Autor Cointelegraph By Francisco Rodrigues

Maintaining decentralization: Are custody services a threat to DeFi protocols?

Maintaining decentralization: Are custody services a threat to DeFi protocols?

Uverejnil používateľ | nov 10, 2022 |

Decentralization is part of the cryptocurrency industry’s core, with various protocols trying over time to achieve the level of decentralization that Bitcoin (BTC) managed to get as it grew organically from a white paper published to a mailing list to a new asset class.Decentralized finance (DeFi) protocols have brought the idea of decentralization to a new level with the use of governance tokens, which give holders the right to vote on or submit proposals regarding issues that govern the development and operations of a project. Governance tokens often represent investors’ ownership in decentralized autonomous organizations (DAOs), which operate using smart contracts.Governance tokens and DAOs are native to layer-1 blockchains that support smart contracts. Often these tokens are bought for investment purposes and kept on centralized trading platforms, which inadvertently gives centralized platforms an outsized power over the protocols they govern.Last month, cryptocurrency exchange Binance accidentally became the second-largest voting entity by voting power in the DAO behind the largest decentralized exchange, Uniswap. According to Binance’s CEO Changpeng Zhao, an internal Uniswap (UNI) transfer automatically delegated tokens.Binance later clarified it doesn’t vote with user’s tokens, but the incident highlighted a problem affecting how decentralized protocols maintain decentralization with custodial services being as popular as they are.Can custodians threaten DeFi protocols’ decentralization?Through its accidental token delegation, Binance could propose governance votes as it had 1.3% of the total supply of UNI, far exceeding the 0.25% threshold. The exchange, however, couldn’t pass votes on its own due to a 4% quorum requirement.Its influence — if the exchange chose to use it — would have nevertheless been significant. Sasha Ivanov, founder of blockchain platform Waves, said that potentially centralized control from custody service providers is a “serious issue with decentralized governance,” adding that the “promise of decentralization” is “totally unrealized with a single token governance model.”To Ivanov, there’s “nothing to stop centralized custody services from exercising their right as token holders,” which means that if Binance wishes, it could “make proposals, vote for them and change the direction of the platform and community.” Ivanov’s solution is a governance model “based on more than just token ownership.”Speaking to Cointelegraph, Hamzah Khan, head of DeFi at Ethereum scaling solution Polygon, said that it’s important to keep in mind that governance tokens have control over each protocol, with every protocol being different in how control is exercised.Khan added that UNI tokenholders, for example, cannot make changes to the protocol’s code or control users’ assets but can make other changes, such as deciding fees on an individual liquidity pool basis, for example.Daniel Oon, head of DeFi at blockchain network Algorand, told Cointelegraph that users usually monitor what centralized platforms are doing with their governance tokens and seek them over a lack of faith in supporting applications, including wallets and poor tokenomic designs.Per Oon, there are various DeFi governance platforms that “ask their users to read multiple proposals, participate in mandatory voting, do X,Y,Z, and stake their tokens” to receive yield as a reward. He added:“In face of all of these administrative tasks, the user decides to hand it over to third-party centralized platforms to handle the voting process so that they can obtain some yield ex-fees charged.”As centralized platforms are known to share generated income with users, the simplified use of governance rewards naturally attracts users to these platforms. This leaves DeFi protocols with the challenge of remaining truly decentralized.Decentralization as a goalTo Ivanov, the challenge of remaining decentralized isn’t currently achievable with single-token governance systems, as protocols using these can only remain decentralized if their token is also decentralized.Recent: Fractional NFTs and what they mean for investing in real-world assetsIvanov said that the industry is in a phase where “decentralization is very much still a goal and not a reality,” as crypto users must “interact with centralized entities to on-ramp and off-ramp into the decentralized economy.” A change will happen, he said, when “we have real-world payment systems through decentralized services.”Khan took a different view, saying that DeFi protocol teams need to remain conscious of what specifically can be changed through governance votes, adding:“As long as the protocol is open-source, permissionless, enables self-custody and has no governance control over user funds or material protocol upgrades that would affect user funds, it remains decentralized.”Khan added that veTokenomics models used by protocols like Curve and QiDao “seem to be an interesting solution to combat decentralized exchanges and other custody agents” from gaining too much control over a protocol’s governance. veTokenomics models allow tokens to be locked or frozen for a specific period of time in exchange for non-transferable veTokens that can be used in governance.Put simply, veTokenomics forces centralized entities not to participate in governance, as locking tokens would reduce the liquidity they need to process user withdrawals. Moreover, the period in which tokens are locked also influences voting power. Khan added:“veTokenomics does seem to protect against centralized custodian governance attacks, whereby token holders are able to ‘lock’ their token in the protocol to participate in governance. For example, if a user locks up a token for 4 years, they receive 4x the voting power.”Unlocking tokens earlier than expected, he said, typically results in a 50% penalty, while voting power boosts decay along with lock-in periods.Oon noted that centralized entities “have been observed to pursue more profitable paths such as lending out those tokens to other organizations” that provide a yield equivalent or higher to that of a DeFi protocol’s voting sessions, which leads to a lower amount of committed votes.As those holding their tokens on centralized platforms do not participate in governance, the voting power of those who do is boosted. When centralized entities do vote directly, he added, general observations “have shown that the centralized entity will usually vote in favor of higher emissions and the like, which increases fees generated.”Such a move could have unpredictable consequences. Michael Nonaka, a partner at multinational law firm Covington and Burling, told Cointelegraph that a DeFi protocol can be decentralized even if the voting power is concentrated in a small number of token holders, adding:“Problems arise if a large token holder is able to wield enough influence to alter the trajectory of the DeFi protocol to reflect the holder’s objectives, rather than the objectives identified by the protocol to spur interest in the token and protocol. “Nonaka noted that in such a scenario, other holders may sell their tokens over the belief that they no longer represent the value of the protocol’s founder or tokenholders.As it stands, any action centralized entities take could easily affect decentralized governance. Most centralized entities seemingly do not participate in on-chain governance but simply safeguard users’ tokens on their platforms.Influencing decentralized governanceIf centralized entities do attempt to influence a protocol’s governance — either for their own gain or because they believe it’s the right thing to do — there are several options available to tokenholders.Khan believes that one option is to no longer participate in that protocol. He said:“One of the primary principles of Web3 and DeFi is the right to exit and the right to fork — users are not required to continue using a specific DeFi protocol if they don’t agree with its governance.”Khan elaborated that if centralized actors leverage their custodied voting power for malicious intent, users can “simply withdraw their funds and developers can fork the code to create a governance structure that is more aligned with the values of the users, developers, investors, and other stakeholders.”Anton Bukov, co-founder of decentralized exchange (DEX) aggregator 1inch Network, seemingly agreed with Khan, stating:“DeFi users should understand that depositing their digital assets to custodian platforms also gives voting power to these platforms. I want to believe that if those platforms would take any unexpected actions with deposits, this would lead to reducing deposits and user base.”Speaking to Cointelegraph, David Weisberger, CEO of smart order routing software provider CoinRoutes, said the actions of regulators around the world could also heavily influence decentralized governance. If “regulators demand visibility into the controlling owners of protocols,” concentration on custody service providers could “help the protocol adapt.”Recent: Some central banks have dropped out of the digital currency raceOKCoin chief operating officer Jason Lau told Cointelegraph that, over time, capital flows increase as more financial institutions get involved in DeFi. He predicted that services will likely adapt to the space rather than influence it to change:“Custody services shouldn’t be seen as the primary challenge to DeFI. DeFi proponents will likely grapple with user trust failures, as seen with the Tether scandal, and likely government regulation that will change how DeFi operates. Instead, we have seen custody services adapt to include DeFI principles in their services.”The emergence of decentralized custody solutions also means institutional investors can self-custody their funds while allowing protocols to remain decentralized, Lau added. Nevertheless, using regulated custodians can “enhance the credibility of a Defi protocol,” he said, and could both improve security while ensuring transparency.There’s still a lot left to be figured out, as decentralized protocols are, just like cryptocurrencies, the cutting edge of financial technology. Engaging in decentralized governance, for now, can be seen as a brave endeavor as tokenholders explore the unknown.

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Crypto adoption: How FDIC insurance could bring Bitcoin to the masses

Crypto adoption: How FDIC insurance could bring Bitcoin to the masses

Uverejnil používateľ | okt 20, 2022 |

Over the years, several cryptocurrency companies have claimed that deposits with them were insured by the United States Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) as if they were regular savings accounts. While so far, no crypto firm has been able to offer depositors this type of insurance, some speculate it could be the key to mass adoption.The most notable case is that of bankrupt lender Voyager Digital, which saw regulators instruct it to remove “false and misleading statements” regarding FDIC insurance. Crypto exchange FTX has been a beacon of hope looking to backstop contagion in the cryptocurrency industry, but it received a cease-and-desist letter from the FDIC to stop suggesting user funds on the platform were insured.As it stands, even major players in the cryptocurrency space aren’t FDIC-insured. Coinbase, for example, details on its pages that it carries insurance against losses from theft but is not an FDIC-insured bank and that cryptocurrency is “not insured or guaranteed by or subject to the protections” of the FDIC or Securities Investor Protection Corporation (SIPC).The exchange, however, points out that “to the extent U.S. customer funds are held as cash, they are maintained in pooled custodial accounts at one or more banks insured by the FDIC.” Speaking to Cointelegraph on the subject, a Coinbase spokesperson only said she can confirm “that Coinbase is aligned with the latest FDIC guidance.”So what is FDIC insurance, why is it so sought-after in the cryptocurrency industry and why does it remain so elusive?What is FDIC insurance?The FDIC itself was created amid the Great Depression in 1933 to boost the financial system’s stability following a wave of bank failures during the 1920s and has managed to protect depositors ever since.FDIC insurance refers to the insurance provided by this agency that safeguards customer deposits in the event of bank failures. Cal Evans, managing associate at blockchain legal services firm Gresham International, told Cointelegraph:“FDIC insurance is basically a layer of protection that covers one individual for up to $250,000 and its a backing that’s given by the United States government. It says ‘look, if this company goes bankrupt, we will guarantee your account to the value of $250,000 per person, per company.’”So, if an FDIC-insured financial institution fails to meet its obligations to customers, the FDIC pays these amounts to depositors up to the assured amount while assuming the bank and selling its assets to pay off owed debt. It is worth noting that FDIC insurance does not cover investments like mutual funds.Other countries have similar schemes, with deposits in the European Union being guaranteed up to $98,000 (100,000 euros) to protect against bank failures, for example. These schemes improve confidence in the financial system.Speaking to Cointelegraph, Noah Buxton, a partner and practice leader for blockchain and digital assets at consulting firm Armanino, said, “No customer’s crypto holdings are FDIC-insured today,” but added that crypto platforms often hold customers’ dollar balances in financial institutions that are FDIC-insured.There is a distinct difference between users having their funds insured, and the impact of a cryptocurrency firm having FDIC insurance — even for only United States dollar deposits — is hard to estimate.The potential impact on cryptoIf the FDIC were to insure deposits at a cryptocurrency platform, it would likely gain an advantage over other U.S.-based cryptocurrency platforms, as the perceived security of that platform would gain a huge boost, especially as it would be seen as a green flag from regulators as well.Recent: Tech’s good intentions and why Satoshi’s new ‘social order’ founderedEvans said that the FDIC would give the retail market “a lot more confidence because if FDIC insurance does happen and does apply to these companies, that means it’s going to massively, massively encourage people who are in the United States to put their money in crypto because it’s as secure as putting dollars at a bank,” adding:“It’s going to massively help adoption, because it’s going to encourage the retail market to see companies like this at a parallel, in term of safety, with banks that people know.”Mila Wild, marketing manager at cryptocurrency exchange ChangeHero, told Cointelegraph that one of the biggest problems the cryptocurrency sector faces is a lack of regulation and supervision, especially after the collapse of the Terra ecosystem “undermined the confidence of many investors.”Per Wild, the FDIC doesn’t just insure customer deposits, as it also “conducts constant monitoring of financial institutions for security and compliance with consumer protection requirements.”Dion Guillaume, global head of PR and communication at crypto exchange Gate.io, told Cointelegraph that a “friendly crypto regulatory environment would be critical for adoption,” as “blind regulatory sanctions” do not help. Guillaume added that insuring digital assets can be very different and several factors need to be carefully considered.How hard is it to get FDIC insured?As the FDIC could significantly boost confidence in the industry and several large exchanges have shown interest in getting it, it’s important to look at how hard it is for a cryptocurrency-native firm to actually become FDIC-insured.Evans told Cointelegraph that it’s “actually relatively straightforward to get” as long as specific criteria are met by the organization looking to get it. The organization needs to make necessary applications and prove requisite liquidity and could potentially have to detail its management structure.To Evans, FDIC insurance would “massively give companies operating in the United States a huge, huge benefit over foreign firms,” as U.S. residents who open accounts with insured firms would have a major incentive not to use decentralized exchanges or other peer-to-peer platforms.Wild had a more negative stance, saying it’s “not possible to get FDIC insurance,” as it only covers “deposits held in insured banks and savings associations and protects against losses caused by the bankruptcy of these insured deposit institutions.” Wild added:“Even if we imagine that crypto projects will be able to have FDIC insurance someday, it means sacrificing decentralization as one of the core crypto values.”She further claimed that the FDIC’s statements on dealings with crypto firms are “trying to infringe on crypto companies and emphasize their perceived negative impact on society.” Wild concluded that the FDIC telling crypto projects not to suggest they’re insured “could further lower” trust in cryptocurrencies.To Wild, cryptocurrencies will remain a riskier asset for the time being, as users won’t have any type of government protection. As a result, crypto users should “stay vigilant about their assets.” This does not mean fiat savings are safer, she said, as increasing inflation is eating those away.Noah Buxton, a partner at consulting firm Armanino, went into more detail on the process, telling Cointelegraph that platforms attaining FDIC insurance would “require a modified underwriting regime, the creation of which has many significant hurdles.” He said the FDIC would need to figure out how to take possession of crypto assets, how to value them and how to distribute them to the customers of failed crypto platforms, adding:“While this is possible and may happen, we are more likely to see private insurance and reinsurance vehicles fill the void for the foreseeable future. This is a necessary component of any market and the broader coverage availability and competitive set of insurance options will benefit crypto holders.”Is the insurance worth chasing?If users are, in the future, able to get insurance through other sources — such as private company solutions or decentralized protocols — it’s worth questioning whether FDIC insurance is worth it in the long run. Insurance from the FDIC could be a significant centralizing factor, as most would likely move to a platform that has its backing.Evans said he believes FDIC insurance “is not necessarily wanted or needed,” as wherever there’s more protection, “there happens to be more oversight and regulation,” which would mean insured companies would be “very secure and very regulated.”These regulations could further restrict those who are able to create accounts with these companies, which would add to the question of centralization that the crypto insurance industry already faces.Bitcoin Foundation chairman Brock Pierce told Cointelegraph that the crypto industry will nevertheless “see more companies try to get it” after the recent wave of crypto lenders going under, which will make it “even harder for them now.”Pierce did not expect FDIC insurance to “be a big deal or matter much with regards to overall crypto adoption.” Whether it impacts cryptocurrency adoption at all may only be clear once/if the FDIC does insure cryptocurrency deposits.Recent: ‘The social benefits are huge’: Web3 gaming to shift digital ownershipIt’s worth noting that FDIC insurance may bring in a false sense of security. While no bank depositor has lost their funds since the FDIC was launched, its reserve fund isn’t fully funded. The FDIC, according to Investopedia, is “normally short of its total insurance exposure by more than 99%.”The FDIC has, at times, borrowed money from the U.S. Treasury in the form of short-term loans. Self-custody may, for the experienced cryptocurrency investor, continue being a viable option, even if a crypto firm is one day FDIC insured.

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FTX’s $1.4B bid on Voyager Digital assets: A gambit or a way out for users?

FTX’s $1.4B bid on Voyager Digital assets: A gambit or a way out for users?

Uverejnil používateľ | okt 5, 2022 |

In September, cryptocurrency exchangeFTX US secured the winning bid for the assets of embattled crypto brokerage firm Voyager Digital with a bid of approximately $1.4 billion. The bid was made up of the fair market value of Voyager’s crypto holdings “at a to-be-determined date in the future.”According to Voyager, at current market prices, the fair value of its holdings was estimated around $1.3 billion, and the deal included an “additional consideration,” estimated to be worth approximately $111 million.Since then, new details on the case have emerged, with court filings showing that the cash paid for Voyager Digital itself was only $51 million. The $1.31 billion FTX offered for Voyager crypto holdings are set to be distributed to eligible credits on a pro-rata basis, according to the filings.The $111 million included in the deal are, as a result, split between the $51 million being paid for Voyager’s assets, intellectual property and user base, and the $60 million that consists of an accumulated $50 account credit for each user who onboards with FEX and a $20 million earnout.Voyager’s users search for answersWhile news of FTX’s winning bid trickles in through court documents and other scarce sources, users of the bankrupt firm keep on searching for answers, organizing through social media to accumulate as much information as possible.Initial math done by users taking Voyager’s balance sheet into account has suggested that users who move on to FTX can expect to get a haircut of over 30% on the assets they held. To some, seeing any type of return is better than seeing nothing after the platform went under.Voyager Digital’s balance sheet. Source: Reddit, Sedar.FTX’s CEO Sam Bankman-Fried has said that its bids were “generally determined by fair market price,” with the company buying up assets to give them back to customers.to be clear — in Voyager, our bids are generally determined by fair market price, no discounts; goal isn’t to make money buying assets at cents on the dollar, it’s to pay $1 on the $1 and get the $1 back to customers.If we were to get involved in Celsius, it would be the same.— SBF (@SBF_FTX) October 2, 2022Voyager’s problems emerged after the firm extended a loan of $670 million to crypto hedge fund Three Arrows Capital, which defaulted in late June. FTX’s bid excluded the Three Arrows Capital loan.As it stands, it seems users who will receive their assets back will have to flock to FTX’s trading platforms if the court approves the deal. The Voyager app would, as a result, reach its end while FTX’s user base would swell significantly.Recent: Is payments giant SWIFT preparing for a blockchain-bound future?To users who may soon be moving to FTX, there are a few concerns that they need to be aware of if they choose to stay on the new platform.FTX offers its users an earn program that allows them to earn interest on their cryptocurrency holdings, albeit with annual percentage yields (APYs) that are usually lower than those users were getting on other crypto lending platforms, including Voyager.FDIC insurance snafuBefore Voyager Digital went under, regulators directed it to remove “false and misleading statements” that its users’ deposits were insured by the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) as if they were regular savings accounts.In a joint letter, Seth Rosebrock and Jason Gonzalez, assistant general counsel at the FDIC, suggested that Voyager’s representations “likely misled and were relied upon” by customers placing funds on the platform.While FTX has been seen as a beacon of hope attempting to backstop contagion in the cryptocurrency industry after a run for liquidity led to the collapse of several firms, the FDIC also warned it to stop making “misleading” statements regarding the insurance status of users’ deposits.FTX received a cease-and-desist letter from the FDIC to stop suggesting user funds on the platform were insured. The letter specified that Brett Harrison, the president of FTX US, said in a tweet that direct deposits from employers were stored in FDIC-insured accounts in users’ names.While Harrison responded on social media by saying that he deleted the post and didn’t mean to indicate that cryptocurrencies stored in FTX are insured by the FDIC, his statements could have misled users flocking for safety.Contagion risksAs users move to FTX either because they enjoy the platform, want to diversify from Binance or Coinbase or want the ability to earn interest on their tokens, the company grows.It’s unclear whether FTX’s attempts to backstop contagion in the cryptocurrency space could be leaving the exchange itself vulnerable, although experts believe what it’s doing is risky.Speaking to Cointelegraph, Richard Gardner, CEO at fintech firm Modulus, said it’s important to recognize the “FTX gambits” for what they are, as attempts to “buy up risky assets at rock bottom prices to expand a la Andrew Carnegie.”Gardner added that Bankman-Fried is “attempting to consolidate the industry” by betting on high-risk endeavors. He concluded:“This recession is in its earliest stages, and the smarter play is to let the Fed’s monetary policy shifts play out and save capital. In the relatively near future, there will be companies, complete with better fundamentals and greater viability, in need of a bailout. Those companies will be the better investment. FTX is simply playing roulette at this point.”Investors who may potentially be moved to FTX may also want to consider that the company is involved in American politics as its digital markets co-CEO Ryan Salame has campaigned with his girlfriend Michelle Bond, a New York Republican running for Congress.Salame has reportedly spent millions on political donations in the 2022 election cycle by donating to cryptocurrency-focused super political action committees (PACs). Super PACs can raise unlimited amounts of money to support candidates but cannot donate to them directly.Some of the funds Salame deployed, according to finance reports, appear to have been funneled into Bond’s race after a series of money transfers. Bond herself holds cryptocurrencies.Alameda Research and FTXAlameda Research is a crypto quantitative trading firm and market maker founded by FTX’s CEO Sam Bankman-Fried. The firm often seems to fly under the radar, but its trading volume and incredible profit of $1 billion in 2021 have made the task harder as time goes by.Alameda Research’s influence has been seen by some as a potential conflict of interest, taking into account its relationship with FTX. Cory Klippsten, CEO of crypto startup Swan Bitcoin, has been quoted saying that FTX and Alameda have been “able to benefit from a regulatory gap that has allowed them to trade and profit from cryptocurrencies” without following the same rules traditional financial institutions do.For its part, Sam Bankman-Fried has said Alameda is a “wholly separate entity” that gets no preferential treatment. As Bloomberg reported in September 2022, questions persist because Bankman-Fried and Alameda’s CEO Caroline Ellison have until recently shared an apartment with eight other colleagues.Recent: Man and machine: Nansen’s analytics slowly labeling worldwide walletsEllison has addressed these concerns, saying they’re “arm’s length and don’t get any different treatment from other market makers.” Alameda was initially FTX’s largest trader, as in its early days, the exchange had limited access to liquidity. According to Bankman-Fried, it’s no longer the platform’s biggest market maker.While the potential conflict of interest could mean regulators will soon target FTX once again, the company is reportedly actively in talks with the United States Securities and Exchange Commission (SEC), which reduces regulatory risk.As users flock to FTX — or any other centralized entity — it’s important to always consider the pros and cons of keeping funds on that platform. As Bitcoin (BTC) advocate Andreas Antonopoulos famously said: not your keys, not your coins.

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Are decentralized digital identities the future or just a niche use case?

Are decentralized digital identities the future or just a niche use case?

Uverejnil používateľ | sep 28, 2022 |

As users take advantage of online services and explore the internet, they eventually create a digital identity. This type of identity is then tied to central entities like Google and Facebook, which make it easier to share data with new services through simple sign-in buttons.While these digital identity management systems are convenient, they are relying on centralized intermediaries that hold and control user data. Personal identifiers and attestations are in their hands, and they can decide — or be forced — to share this information with other parties.Blockchains offer a solution: decentralized digital identities. These allow individuals to manage information related to their identities, create identifiers, control who they’re shared with and hold attestations without relying on a central authority, like a government agency.A decentralized identifier for a decentralized identity can take the form of an Ethereum account. Users can create as many accounts as they want on the Ethereum network without anyone’s permission and without anything being stored in a central registry. Credentials on the Ethereum blockchain are easily verifiable and tamper-proof, making them extremely trustworthy.Other use cases are out there. In August 2022, Binance catapulted the decentralized identity debate to social media platforms after moving to launch its first soulbound token, BAB, serving as users’ Know Your Customer (KYC) credentials.Whether decentralized identities are the future of online activity remains to be seen.Managing decentralized identitiesSpeaking to Cointelegraph, Witek Radomski, chief technology officer and co-founder of nonfungible token ecosystem Enjin, revealed he sees a future in which the metaverse will see a “blend of social media networks, email, crypto wallet addresses, and decentralized applications,” suggesting there will be a mix of digital and decentralized identities.Per Radomski, the key to identity management will be the “preservation and protection of sensitive information,” as different networks have “distinct technical methods to track digital ownership of data.”Recent: Vietnam’s crypto adoption: Factors driving growth in Southeast AsiaRadomski added that individuals entrusting protocols with their personal data should consider that big business decisions will be made based on an enterprise’s needs and philosophy, adding:“The ownership of digital assets mimics asset possession in the physical world. Assuming that owners are operating within the bounds of the law, blockchain-enabled digital ownership cannot be interfered with by the government.”He added that decentralized identities will play a role in preserving individuality, which will “depend on proving that you’re not a bot” and will have online activity as one of the “most compelling testaments to demonstrate this.”The potential of decentralized identitiesManaging digital identities is a challenge, as one mistake can easily lead to a breach of personal information. Centralized entities have been known targets, with a recent case seeing the personal data of Portugal’s president stolen in a cyberattack. The use of decentralized identities eliminates this risk, as only the users are responsible for their data.Speaking to Cointelegraph, Dmitry Suhamera, co-founder of IDNTTY — a decentralized public infrastructure layer enabling a decentralized identity approach — said that centralized digital identity providers “compete with each other, which actually hinders widespread adoption,” as in the end, “the user needs an ID for government services, an ID to interact with a bank, an ID to work with a cooperation.”Real-world use cases have seen digital identity programs’ adoption slow down shortly after launching, with Suhamera using Gov.UK Verify in the United Kingdom, which saw less than 10% of the population signing up, as an example. Nigeria’s adoption of eID, Suhamera added, stalled in 2017 amid issues with public-private partnerships used to launch the program.Per Suhamera, centralized digital identity solutions tend to “be quite expensive and offer an inconvenient monetization model” as users have to buy and pay for national IDs before using them digitally.Cross-border uses of digital IDs are also complex, Suhamera added, as corporations and regulators have to line up bureaucracy, which can be a slow process. Suhamera added:“Decentralized ID allows for the creation of a distributed ‘cheap,’ easy to integrate repository of personal ID (for which only the user is responsible) with which any service can integrate, from KYC providers and digital signatures to any online or identity services.”While decentralized identity can make identifiable information more portable while keeping it safe, centralized entities managing digital IDs “tend to provide a set of services at once,” boosting user experience.Decentralized identities have a number of use cases, including the potential for universal logins across a number of applications without the use of passwords. Service providers can issue attestation tokens granting users access to their platforms after a single sign-up, for example.Binance’s soulbound token shows that user authentication and KYC is also a possibility on the blockchain through the use of non-transferable tokens. Because these tokens aren’t transferable, voting through the blockchain without manipulation is a real possibility.Security concernsWhile decentralized identity management does appear to have significant advantages, the technology does not come without its drawbacks. For one, self-sovereignty means it may not be the most user-friendly approach.Speaking to Cointelegraph, Charlotte Wells, communications manager at crypto platform Wirex, said digital identities have been around for some time, although blockchain-based digital identities will “be a game-changer in the future web 3 due to their decentralized nature.”Wells pointed out that the amount of user data stored online is steadily growing, creating “huge security concerns over how this data will be stored and who will have access to it.” She pointed to data breaches at Facebook, which exposed the data of millions of its users. Per her words, decentralized digital identities will be “vital in allowing us to have ownership and control over our credentials.” Wells commented:“Self-sovereign identities use blockchain technology and zero-knowledge proofs to store digital identities on non-custodial wallets – the biggest advantage being that users have complete control over this and decide what companies, apps and individuals have access to this data.”She added that there are drawbacks: One important role of centralized entities is “enforcing standards of regulation, giving users and businesses the reassurance they need to work on the web.” Without these central authorities, Wells concluded, there may not be the same level of protection for decentralized identities.Zero-knowledge proofs are a way of proving the validity of a set of data without revealing the data itself. This technology, paired with decentralized identities, could mean users can prove who they are while under pseudonyms, ensuring their security isn’t affected.Recent: Institutional crypto custody: How banks are housing digital assetsTo Fabrice Cheng, co-founder and CEO of Quadrata, blockchain-based digital identities are going to change the concept of digital IDs and create new use cases for the Web3 space. Speaking to Cointelegraph, Cheng noted that it is still important to be mindful of what’s shared, noting that people should “be aware o their behaviors on the blockchain.”With the Ethereum blockchain acting as a global directory for decentralized identities of users who choose what they share and are in control of their data, it’s hard to imagine a scenario in which crypto-native users wouldn’t prefer this alternative. Non-crypto native users, however, may prefer to keep using centralized providers and share their data, at least until the user experience becomes as simple.

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Roth IRAs: The ideal long-term cryptocurrency investment?

Roth IRAs: The ideal long-term cryptocurrency investment?

Uverejnil používateľ | sep 20, 2022 |

As the cryptocurrency market matures, more governments throughout the world introduce legislation to tax proceeds from crypto-related activities, with traders often triggering taxable events that can lead to future complications.Avoiding paying taxes is illegal, but there are legal ways to dodge triggering taxable events while hodling onto one’s cryptocurrency holdings: Roth IRAs. These are individual retirement accounts (IRAs) with a special type of tax-advantaged system.Using IRAs to avoid triggering taxable events with cryptocurrency investments is a strategy that has been considered for some time, with North American mining and hosting firmCompass Mining offering a solution for BTC users to mine directly to their IRAs last year.Before diving deeper, it’s important to point out that Roth IRAs are only available in the United States, although other countries often have their own form of tax-advantaged investment vehicles. Often, stocks with significant exposure to Bitcoin — such as MicroStrategy — have to be used as a proxy for some of these vehicles.What are Roth IRAs?A Roth IRA is a type of individual retirement account to which investors contribute after-tax earnings. What makes Roth IRAs stand out is that what investors place in these savings accounts can grow tax-free and be withdrawn without any other taxes being owed after they’re aged 59 ½, if the account has been open for at least five years. Essentially, a Roth IRA considers that since taxes have been paid on the funds being contributed into the account, investors do not need to pay any further tax as long as they meet the specific conditions outlined above.Roth IRAs can be funded in various ways beyond regular contributions, which have to be made in cash. Assets permitted into Roth IRA accounts include stocks, exchange-traded funds, money market funds, bonds, mutual funds and cryptocurrencies.The Internal Revenue Service (IRS) does not allow for direct cryptocurrency contributions into these accounts, but these are various Bitcoin IRA solutions that are designed for investors to save cryptocurrencies in these accounts. It’s worth pointing out that yearly contributions to Roth IRAs are limited based on IRS specifications and that investors can keep Roth IRAs as long as they please, as there are no required minimum distributions.Is it a good idea to add crypto to a Roth IRA?Cryptocurrencies are known for being extremely volatile, which means they aren’t for every investor out there. More conservative investors will likely be happier holding bonds, mutual funds and exchange-traded funds, while investors with a larger risk appetite may consider allocating to crypto.The growth potential of cryptocurrency holdings in a portfolio is enough to lure in investors who believe cryptocurrencies will keep on growing in popularity as the infrastructure around them boosts accessibility and new crypto-related products and services are created. This growth potential, it’s worth pointing out, comes with heightened risk.As tax-free withdrawals from Roth IRAs require accounts to be at least five years old, cryptocurrency investors looking to take advantage of them should always be prepared to hold onto their funds for a long time.Chris Kline, co-founder of cryptocurrency IRA platform Bitcoin IRA, told Cointelegraph that there are no tax benefits on contributions to Roth IRA accounts, but there are tax benefits on distributions:“If you have a longer time horizon in Bitcoin and crypto, a Roth IRA could be an appealing choice for those looking to take advantage of the long-term promise digital assets offer.”To Kline, cryptocurrencies are going to “disrupt the very fabric of our everyday lives in ways like the internet disrupted communication and email disrupted the post office.” The co-founder of Bitcoin IRA added that while real estate and gold were premier examples of diversification in the past, crypto has “asserted itself as an alternative in the modern economy.”Recent: The Metaverse is becoming a platform to unite fashion communitiesKline added that cryptocurrencies can offer an “alternative path forward for people of all ages” and that there’s been a surge in interest in investing in crypto assets for diversification.Kunal Sawhney, CEO of equity research firm Kalkine Group, seems to disagree with Kline’s approach. Speaking to Cointelegraph, Sawhney said that if a person has “spent time and labour to earn money, it should ideally not go into extremely risky assets like cryptocurrencies.”Otherwise, he added, it “defeats the idea of investing for retirement.” Sawhney cautioned that cryptocurrencies aren’t just Bitcoin (BTC) and that betting on these increases the risk that investors fall prey to Ponzi schemes.As an investment category, he said, cryptocurrencies “might not be so bad” as these assets may become the “biggest contributor to the overall amount in the Roth IRA when the contributor retires and plans to withdraw.” Once again, their potential outsized performance is weighed against their risk.For long-term investors expecting these outsized returns, placing cryptocurrencies in a Roth IRA lets them realize their capital gains without getting taxed, although they’ll have to stomach the ups and downs for a while.Portfolio diversificationThe extreme volatility of cryptocurrencies makes them a not-so-easy investment when talking about retirement, with the jury being out on whether including cryptocurrencies in a 401(k) retirement plan issound financial planning or gambling with the future.To Sawhney, investors need to have a pre-determined strategy for their Roth IRA. The CEO noted that a 60/40 portfolio, with greater exposure to stocks than to bonds, was “long considered balanced and financially rewarding” but suggested cryptocurrencies are changing things:“Now that there is an option available to hold relatively the most volatile asset, cryptocurrency, a new strategy, say 50/40/10, might be considered. Here 10% could go to the new asset class comprising cryptos. Investors should have the option to change the allocation share per their risk appetite.”Recent: Does the Ethereum Merge offer a new destination for institutional investors?Due diligence, Sawhney concluded, is crucial as Roth IRAs are often “viewed as one of the best investment vehicles for young and low-income earners.”Speaking to Cointelegraph, Kevin Maloney, interim CEO at crypto retirement account provider iTrustCapital, said that volatility is actually “one of the main reasons why many investors prefer using a Roth IRA or any other type of IRA to invest in crypto.” He added that even day-traders could benefit:“For those who want to ‘day-trade’ due to the volatility of crypto, an IRA still represents a solid option because they won’t be paying yearly taxes on their gains so long as they aren’t taking distributions.”Whether investors are looking to add cryptocurrencies to their Roth IRA accounts, it’s important note that crypto assets are only available for these accounts through custodians, which may charge hefty trading fees.It’s up to every investor to analyze what type of investment vehicle best suits their situation and risk appetite. Roth IRAs may be extremely beneficial for long-term investors, as, since 2014, the IRS has taxed cryptocurrencies as property, and capital gains taxes can be owed on depreciated assets.The views and opinions expressed do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.

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