After FTX's downfall, investors are taking their digital assets off-exchange, is self custody wallets the new normal for global adoption?
After the collapse of the FTX exchange, users' trust in centralized crypto exchanges is also declining. Long-term holders have finally realized the importance of self-owning the keys to their digital assets and have started moving record volumes of their digital assets from exchanges to self-custody wallets. The founder of Ethereum, Vitalik Buterin has also suggested that CEXs should use technologies involving ZK-SNARKs and others etc.
Due to the FTX incident, users are now asking the exchanges to show their proof of reserves, the total amount of assets, wallet addresses etc. The best way for exchanges to prove total user deposits is to simply publish a list of their users' wallet addresses along with their names.
Even if there are many advantages to using self-custody wallets, there are many drawbacks too. The common problem is that users could permanently lose access to their assets if they forget/lost their keys (seed phrase). Exchanges can solve this problem through e-mail recovery and other advanced forms of account recovery through know-your-customer details. But this would require the exchange to have control over the user’s funds.
So in short, investors and holders need to choose between self-custody wallets or CEXs. For long-term holding self-custody wallets especially cold wallets, is the preferred choice among big investors. However, the global adoption of digital assets like bitcoin is more likely to be done through the centralized exchanges. At the time of writing this article, the global cryptocurrency market capitalization stands at $800 Billion.
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