With an increasing number of large institutional investors moving their funds from centralized exchanges (CEX) to personal wallets, blockchain analysis firm, Chainalysis, argues that now is the ideal time for self-custody solutions to take on enterprise-grade features.
Studying on-chain activity, Chainalysis noted that the collapse of FTX and its contagion through the cryptosphere, has prompted large outflows from centralized exchanges, as many users shifted their funds to personal wallets.
“We found that while the trend wasn’t as pronounced as some suggested and likely did not signal a mass exodus from centralized exchanges (CEXes), more users were opting for self-custody and turning to DeFi protocols to carry out activities like trading, lending, and borrowing,” reports Chainalysis.
As it analyzed the transfer of funds, the next obvious question the firm tackled was what were the institutional investors doing with the funds once they had moved them to their personal wallets?
The firm believes that while many of them are likely just holding the funds there, or even transferring them to a new CEX, on-chain data also suggests that many are using the funds to interact with decentralized finance (DeFi) protocols.
Read More: DeFi-driven speculation pushes DEXs’ transaction volumes past those on CEXs
Over the years the number of DeFi solutions that enable users to trade, invest, borrow, and lend cryptos without the aegis of a centralized exchange has been on the rise. It appears they’ve now gained the nod of approval from institutional investors as well, with an increasing number using these services to carry out financial functions without having to give up custody of their funds.
According to Chainalysis, DeFi protocols have historically seen surges in transaction volume in the same time periods of increased CEX-to-personal-wallet flows. Putting two and two together, it concludes that given the growing role of institutional money in these large-scale withdrawal events, it’s safe to say that institutional investors are playing a key role in the migration of funds from the centralized finance (CeFi) to the DeFi ecosystem.
Rising to the occasion
While the interest of institutional investors in DeFi is encouraging, so is their interest in keeping funds outside of CEXs and inside self-custody solutions, something that wasn’t in vogue a couple of years ago.
Chainalysis argues that self-custody solutions must capitalize on this interest to improve the usability, security, and compliance components of their solutions so as to meet the needs of large investors.
It has drawn up a number of steps for wallets to help institutional investors pursue their investment strategies without compromising their funds.
For starters, wallets should support more blockchains to enable investors to access as many assets as possible without managing multiple wallets. Secondly, wallets should consider rolling in the ability to preview transactions in order to allow users to see exactly what will happen if they execute a specific transaction, sign a contract, or connect to a protocol.
Besides these, better tools and processes for managing private keys, integrating compliance tools, and speeding up transactions, are some of the other ways that wallets could make themselves appealing to institutional investors.
“Ultimately, self-custody solutions will likely vary by institution, but these are a few ideas of features that could help them transact more efficiently and safely,” concludes Chainalysis.