This is the first article in a five part series by Chadly McChief\’s (@ChadMcchief). The series will cover core concepts to both cryptocurrency and finance. Consider this an introductory text to self custody and decentralization, concepts fundamental to future discussions.
A key notion within the world of decentralized finance (DeFi, for short) is the idea that ultimately you, as a sovereign individual, are in charge of your own finances. It is common to hear that the facilitation of self custody and decentralization are the primary purpose of cryptocurrency.
This, of course, goes against the commonly accepted framework for personal finance. So-called “paper money” has long been on the decline. This trajectory has been accelerated by global events and technological advancements over the past decade.
As a result, “digital money” is almost ubiquitous. However, as an individual, this digital money is only accessible to you within the confines of the established financial system. To put it bluntly – banks.
Centralized Custodians
Banks act as a centralized authority figure, approving (or declining) transactions “on behalf” of individuals. Banks are businesses. They have stockholders and a legal obligation to pursue profit. Those profits are made by lending the deposits that individuals provide them.
This creates a tough dilemma for most individuals – they are given the illusion of choice by being offered access to multiple banks. But, the reality is that individuals are unable to move their digital money without the approval of traditional finance (or TradFi, for short).
Not only is this a stifling of personal freedom, it also creates moments of genuine peril. If a bank decides as a matter of policy not to offer you access to your stored funds, which only they and their fellow banks can approve, then you may find yourself penniless.
In DeFi, self custody is promised as the antidote to this problem. Digital wallets enable you to store your money without a bank’s virtual vaults and blockchains act as the “approver” to the movement of any value. As a result, banks are not the custodians of your wealth – you are.
Challenges
Self custody is not a miracle cure, of course.
Whilst banks will often offer some form of government-backed protection of the funds that they are tasked with handling, there are no such assurances in a digital wallet, as there is no centralised authority backing DeFi.
Additionally, most digital wallets rely on the idea that their users will take proactive safety measures, such as securely storing their seed phrase or using a hardware wallet to protect against bad actors.
Users explicitly accept theses risks in exchange for becoming ‘unbanked’ or custodians of their own digital money. The idea of self-custody, or more broadly self-reliance, is enshrined within the basic principles of DeFi and is a core concept we will often return to.
Catch us next week for the second article in the Core series: Traditional Finance.
