Ethereum was one of the first disruptive innovations to the financial ecosystem with the development of infrastructure that enabled censorship-resistant smart contracts. It afforded us many improvements over how things are done in traditional finance. And in a relatively short period of time, it’s become the blockchain network by market capitalization. But despite creating a new market and value network, institutional involvement still revolves around a predominantly TradFi stack. When we look at custody and clearing, for example, institutions involved in trading crypto are largely reliant on TradFi infrastructure models. So far, we’ve largely failed to disrupt traditional financial infrastructure beyond the settlement layer. second-largest So what will it take to truly disrupt legacy infrastructure? The Problem with Incumbents The ethos of blockchain and DeFi is to build systems that are decentralized, censorship-resistant, and transparent, which inherently challenges the status quo of traditional financial institutions and their centralized, opaque nature. However, it's crucial to understand the reasons why there has been a compromise in the first place. For one, traditional financial institutions are deeply entrenched, not just in the economy, but also in society's norms and laws. It's hard to change systems that are so deeply rooted, and it's even more challenging to encourage people to adopt new systems. Moreover, traditional financial institutions possess a vast amount of resources and influence, making them formidable entities to challenge. They’re also backed by governments and are embedded in regulatory frameworks, which can act as barriers to the adoption of blockchain technology in the mainstream financial sector. Existing systems and structures tend to strongly resist radical changes and new innovations often get watered down to fit within these existing paths. This is exactly what’s happening today - institutions are being pressured by investors to involve themselves in the digital asset space, but they’re still heavily reliant on web2 frameworks. Overcoming Path Dependency Despite blockchain’s disruptive potential, whilst trying to onboard traditional financial institutions, we've often mirrored the legacy infrastructure which we aim to supersede. For example, if we compare Ethereum to legacy financial infrastructure, it might be considered the modern global financial settlement layer. But what about other layers of financial services infrastructure like custody, trading, and clearing? In traditional financial services, these layers are typically disintermediated, and for good reasons. But for some reason, as we’ve developed these systems for the cryptocurrency market, we’ve either built bundled service offerings or compromised on the efficacy of these models. Custody has been developed at two extremes: i) completely centralized and often resulting in misappropriation of funds; and ii) completely decentralized resulting in a horrible user experience that stifles general adoption. Trading has faced similar challenges with polar extremes of either CEXs or DEXs. The former being problematic for the same reason as centralized custody solutions and the latter being a terrible experience all round. The saving grace is that we’re now seeing decentralized exchanges transition to on-chain order book models. Clearing presents a whole ‘nother problem entirely. Existing solutions like Copper’s ClearLoop have somehow developed even worse models than traditional finance. The problem is that incumbent forces often favor a more cautious, incremental approach over a full-scale transformation, which leads to a dilution of the radical potential of such innovations and is what we’ve seen with the above models. There is still great potential for blockchain to completely disrupt traditional financial services infrastructure. However, in order to realise its disruptive potential we need to be able to reimagine new frameworks that retain the utility of traditional systems while embracing the ethos and technology of Web 3.0. A New Framework for Custody and Clearing Custody and wallet infrastructure has come a long way since the early days of keeping Bitcoin on external hard drives or penciling seed phrases on a random sheet of paper. Over the course of the last decade, we’ve been able to deliver enterprise-grade custodial solutions to everyone from bulge-bracket financial institutions to retail investors. And competition in the wallet space has forced providers to continually deliver new innovations and improved user experiences. That said, there is still room for innovation and we can only hope to be part of the trend of building better, more secure wallet infrastructure. However, these developments in digital asset custody are meaningless to institutional investors whilst the majority of liquidity sits on centralised exchanges that require custody of user’s assets. The dominance of centralized exchanges in the cryptocurrency industry provides deep liquidity but also exposes users to custodial risks, as evidenced by infamous collapses such as those of , , and . While decentralized exchanges like UniSwap mitigate counterparty risks, they face liquidity limitations and remain disconnected from traditional finance, limiting their appeal to sophisticated players. To fully integrate the cryptocurrency industry into the global financial landscape, it is essential to adopt the practice of separating exchanges from custody and settlement layers, a well-established approach in traditional finance. FTX Mt. Gox QuadrigaCX Existing solutions, such as off-exchange collateral management and settlement systems, offer improvements over traditional models but still fall short in areas like leverage, trading efficiencies, and counterparty risks. Despite dealing with Web3 assets, these solutions hinder the full implementation of Web3 technology and provide a clearing solution that is inferior to Web2 clearing solutions. To realize the full disruptive potential of blockchain technology we can’t simply replicate the very legacy architecture we sought to replace. This means reimagining custody and clearing solutions for a blockchain-based global financial system. And here at , that’s exactly what we intend to do. Krayon The lead image for this article was generated by via the prompt "global finance" HackerNoon's AI Image Generator

This story contains new, firsthand information uncovered by the writer.

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