Making Sense of DeFi, CeFi, and Wallet Custody

date_range December 2, 2021
person Magic Square
In the world of crypto and dApps, decentralization is king. Even though you’d be hard-pressed to find a crypto user who has not made use of a CeFi service (Binance, Coinbase, Kraken), the term “centralized” has adopted some level of vulgarity in the space. We find that there is no real “trustless” system: even in the case of DeFi self-custody, you’re trusting yourself and the code. 

Entrusting code: DeFi and Smart Contracts

Decentralized finance replaces third-party central authorities with a system reliant on logic statements and code to carry out contracts. But how “smart” are these contracts? The creation of a “trustless” system should not undermine the facts on the ground: even if no human is “entrusted” (except for the wallet owner) we rely on smart contracts to handle our finances, and there is no one to turn to in the event of lost keys, hacks, or bugs.

As we fill out the picture, with usability issues surrounding non-custodial DeFi wallets spanning lost keys to complicated interfaces and the total reliance on code, using a custody service may seem attractive.

In fact, since secure access to your wallet is a prerequisite to any other DeFi action, it may logically ensue that CeFi custody is more important in the world of digital wallets than any other DeFi service.

CeFi Custody: trusting third parties

Custody is a service that keeps assets secure. Think of it as a vault for your secret keys to ensure that you don’t lose access to your assets. There is a wide range of custodial wallets as far as the currencies they support and the autonomy they give to the wallet owner.

bitcoin piggy bank

In the case of any custodial wallet, however, you’re trusting a third party, and this trust comes with a whole set of risks. Third parties are just as susceptible to hacks and breaches – if not more so since they represent juicy targets to malicious actors – as well as magnets for corruption and bankruptcy as in the case of Mt. Gox .

Before signing your assets away to a custody provider, you’ll need to invest long research hours considering different custodial wallet options, their security measures and certifications, insurance plans, track record, team leaders, investors, partners, vision and values. There is only a certain extent of time and effort you’ll be able to invest in the process; even after your research, nothing is guaranteed. Once you’ve chosen a provider, you’ll need to undergo a thorough KYC process to prove your identity and gain access to the service, which many users find invasive and cumbersome. 

The Magic Solution

It seems that finding a perfect wallet storage solution Is nearly impossible. Fortunately, you’ll be able to find community-validated solutions on the Magic Store to save your time and energy and give you the peace of mind of sure-footed decisions.

We are paying hundreds of validators to test and research every DeFi and CeFi service before making it available on the Magic Store, so you’ll be able to enjoy the confidence that the custody service of your choice is trustworthy and high quality without doing your own extensive research. You’ll even be able to see each custody service in terms of various parameters. One solution may be superior as far as transaction speeds; another may excel in usability. With this information at your fingertips, you’ll be able to make a far more well-informed decision as far as which service will meet your specific needs.

Furthermore, Magic Square users who chose to use a CeFi custody service will not need to go through any additional KYC processes: the SSI-powered Magic Connect KYC will cover any further KYC requirements without invading privacy or compromising personal information. 

Community validation and its immense advantage

Community validation is a steadfast feature of the decentralized crypto space, and at Magic Square, we are making full use of our community by putting nearly all company decisions to the vote of hundreds of community validators. We believe deeply in the wisdom of the masses, and we treat every service and dApp with scientific scrutiny: a sizable sample and plenty of research parameters. 

Final Thoughts

Magic Square’s layer2 solutions are making it easier for users to make the most of their assets. Custody is just one very important example of how choosing reliable products is crucial to success in the crypto world, and Magic Square is making this nearly incredible feat possible for countless users. Follow our blog and join our community for more product updates, DeFi overviews, project developments, and opportunities.