“Bad actors have been losing people’s hard earned money since… the beginning of money. You deserve a decentralized system where you don’t have to trust us, or any other institution. That’s the promise of crypto. The only thing you need to trust is the math. Everything is transparent, immutable, and verifiable to all.”

Coinbase Full Page Ad, Wall Street Journal, November 17, 2022

2022 has been a rough year for Crypto, dominated by several black swan events. The latest, the collapse of FTX, will wipe out hundreds of millions of customer assets thought to be safe in the exchange’s custody.

There is a place for CEXs (Centralized Exchange) as a significant part of the overall CeFi (Centralized Finance) ecosystem as exchanges for asset purchasing and swapping. They also offer other value-added services and new crypto user onboarding experiences. As a service provider in fintech and financial services, we worked on several over the years.

TradFi (Traditional Finance), CeFi, and DeFi (Decentralized Finance) will continue to be intertwined. CEXs will continue to be a major part of Web 3.0 and decentralization. Additionally, while a few major players in the space have acted in bad faith, there are many trusted exchanges that customers should feel comfortable interacting with.

For the crypto natives or degens, this post may be too much of an explanation of CEXs and Decentralization. However, we hope our points about self-custody are clear. For those new to crypto or are CEX natives, we hope you will appreciate the steep usability curve ahead of you to be on-chain operating with self-custody.

Let’s examine the current state of decentralization to identify the key challenges to solve to unlock mass adoption of self-custody.

The Illusion of Safe Asset Custody

One key challenge is that nearly everyone onboarded into crypto comes in via a CEX. CEXs onboard you through wires, ACH transactions, or debit cards to fund your account. In some cases, KYC (Know Your Customer) & AML (Anti Money Laundering) processes are in place for greater access and limits. These funds end up in the custody of the centralized exchange with the perception that they are protected. Exchanges, whether decentralized or centralized, are for exchanging assets. They are not for storing assets like a traditional bank, yet CEXs customers can easily do this as unsecured creditors at their own risk.

To most, the experience is familiar to retail banking or stock trading platforms in which they closed networks and have safe asset custody. The CEXs’ customers interact with assets from several blockchain networks inside this closed network. In many cases, CEXs have replicated all the functionalities of DeFi platforms to make themselves a one-stop shop. They are easy to use because all the complexities and friction of different wallets and interoperability across chains are removed via their internal record-keeping processes in a single unified user experience accessed with regular Web 2.0 user authentication. 

There are some unfortunate facts about keeping assets on some exchanges. In some cases, exchanges have used their customer’s assets to trade or as loans for additional yield in other CeFi or DeFi platforms. Compounding this, in some cases, centralized exchanges have their tokens or native coins for “utility” or to pay for gas fees on their blockchain network. These tokens gain value and effectively print assets value out of thin air. Sometimes, these assets are part of 1:1 “asset value” schemes enlisted by exchanges sitting on their balance sheets. If these loans between counterparties unwind or the value of the native asset plummets, these exchanges might become insolvent. It was the case with FTX. Worse yet, many exchanges have been hacked and drained over the years, where users lose all of their assets. 

There is a saying in crypto, “Not your keys, not your coins.” For consumer protection, the solution is a self-custodial wallet.

The Need For a Ubiquitous Experience

Over the past week, on-chain analytics show a large volume of assets flowing onto self-custody wallets and increased utilization of Decentralized Exchanges (DEXs). Before this most recent event, industry leaders had predicted that this trend would continue and that DEXs would dominate the future. This adoption trend will likely accelerate as the CEX trust is at an all-time low. 

“The web3 transformation is well underway. DeFi transaction volume grew over 10x from 2020 to 2021, reaching $5.8 trillion. While total transaction volume appears set to fall this year given the bear market, DeFi has driven nearly $3.7 trillion in transaction volume in 2022 — more than half of all on-chain volume. DeFi’s growth is also reflected in the composition of total transaction volume by currency type.“

-- Chainalysis Storyline is Here: Transparency and Clarity for Web3, November 16, 2022

Users can interact with thousands of decentralized applications across several blockchain networks once on-chain. New DEX users face usability challenges not found on CEX. They need to figure out private key management, different wallet software due to incompatible network architectures, and network bridges. Web 3.0 needs to start acting like Web 2.0 with better and more usable solutions capable of handling these challenges. The timing of this tweet chain from Mark Cuban earlier this week could not have been better.

Wallet Providers to The Rescue

Decentralization is inevitable, but we’re early in the process. Blockchains are more efficient, cost-effective, and secure than traditional finance infrastructure. Real-world assets are already heading on-chain as NFTs or tokenized synthetic assets on several blockchain networks. Aside from that, several other use cases of decentralized networks are already blurring the lines between Web 2.0 and Web 3.0. In the future, we believe that the internet will blend centralized and decentralized services. Wallets will be the bridge between ecosystems, offering a portable identity. Still, they will come with challenges solvable by fully integrating the complexities of self-custody into a ubiquitous application. We believe consolidating many of the solutions below will be the path forward as we march toward a decentralized future.

FIAT Onboarding

Onboarding capital into a custodial wallet is challenging. As mentioned above, most people onboard into decentralization via CEXs and then back out to a custodial wallet. For experiences to be ubiquitous and for direct onboarding into self-custody, wallet developers need to implement FIAT (a government-issued currency) onboarding APIs. An entire ecosystem of new players emerged during this past cycle allowing crypto purchases straight from a website or app into a user’s wallet. Direct onboarding will be a significant step towards ubiquity.

Private Key Management

To onboard the first billion users into DeFi, there needs to be a simple and easy-to-use wallet solution that allows for self-custody. The solution must also give the user the safety and security of traditional multi-factor authentication methods of face, fingerprint, social authentication, email, text, etc. Thankfully, several emerging wallet providers are starting to roll out multi-factor solutions that help ease non-crypto natives on-chain with frictionless experiences, giving users a way to authenticate with a lost private key or seed phrase.

Gas Fees

Gas is still a significant usability issue for users. Wallet treasury funding solutions are appearing on the market. Users can fund a transaction no matter what network they are operating on. These solutions help with the gas payment issue. However, users have not become accustomed to paying for anything besides their internet connection. They are not used to paying the equivalent of the Visa network fees on top of a transaction or using an application and paying for infrastructure like AWS in real time. The current market expectation is to pass the fees directly to users at transaction time, conflicting with consumer expectations. In Web 2.0, the fees are buried in product costs or alternative revenue generation on the provider side. Protocols can use The Gas Station Network on Ethereum, which helps to fund these transactions. However, there are limited options on other networks. Blockchains need to offer these types of solutions to protocols natively on the network to make this truly frictionless. 

Protection From Bad Actors

Decentralized exchanges (DEXs) are an intermediary for either two counterparties to interact with one another via an order book or for one to interact with an automated market maker backed by a decentralized liquidity pool. The challenge is that these DEXs face the same negative factors existing in CeFi and TradFi, such as pump-and-dump schemes via a consolidated group of market-making bots, front-running, price manipulation, rug pulls, etc. Additionally, users interact with decentralized applications which may have nefarious code that can extract assets from the user’s wallet without their knowledge.

The difference for DeFi is that users have the advantage of the transparency offered by blockchain ledgers, which easily map and store the history of wallets and contract addresses. It makes it easy to see who the bad actors are, their related wallet addresses, and past activities. For DeFi to be more beneficial to the average internet user, consumer protections must be part of the wallets. There are already credit-scoring-based services that allow counterparties to understand the trustworthiness of which wallet and the related wallets they are interacting with. Wallets need to start implementing scoring solutions and contract scanning to alert users on the trustworthiness of the token, wallet, smart contract, decentralized application, etc. Think of this as built-in risk management that you’d get with an intermediary in TradFi combined with the virus protection you have on your computer. 


The biggest challenge yet to be faced is Interoperability between chains. Ethereum Virtual Machine (EVM) based Layer 1 and Layer 2 networks are more accessible since the same wallet address can be used between all blockchains. It gets much more complicated when you start adding in Bitcoin, Cardano, Ripple, Tron, Cosmos, Polkadot, Solana, Near, Algorand, plus all of their layer 2/3s, appchains, subnets, parachains, zones, statechannels, and the hundreds of other blockchains and all of the bridges in-between them. 

To make wallets usable, we need to move away from knowing which network we’re on and simply give users every address they may need in their wallets. We use the wallet as the asset-switching mechanism to operate across different networks. The experience is too fragmented and requires several wallets, authentications, native assets, and bridges. 

Wallet providers need to create an opaque layer for the user to bridge assets between these networks seamlessly. It will require relayer networks, gasless transactions via protocol or chain, multiple wallet addresses, and wallet treasuries for gas payments. Ultimately the experience should be similar to riding a train and using rails owned by several train networks where they are unaware of who owns which rail network. Interoperability chains like LayerZero, Axelar, and Wormhole are a big step forward. However, we’re still some time away from this opaque interoperability, and wallet providers should prioritize this. 

Wallet providers can’t do this alone. Industry leaders must adopt IBC or other interoperability protocols for their blockchains to provide free access and flow of assets between networks. Without these, we’re adding unnecessary friction via bridges for users to navigate through. It will take a global standard to make this work for the user, no matter the architecture for each chain. It can only happen if leaders can set aside their differences and work together to find a common framework for interoperability. Without this, we’ll be doomed to stay locked in our walled gardens or force users across trustless bridges with poor usability and high-security risk.

The experience should be opaque and frictionless for a user to trade assets on Osmosis on the Cosmos Network, connect their car for data syncing on CarrChain, farm assets on Sushi on Ethereum, clock their steps on StepN on the Solana Network, play Axie Infinity on Ronin Network, or buy NFTs at JPG.Store on Cardano. The user shouldn’t need to know or care about the network, and it's our job in this industry to reduce that friction. 

The Opportunity

It is the moment that DeFi has been waiting for. The industry can leverage this year’s failures in CeFi to create user experiences for onboarding the first billion users that enter DeFi.  Per Mark Cuban, we’ve come a long way with music streaming. Several 40-60% solutions cover some of the functionality required for mass adoption and self-custody—none tackle all.

There is an opportunity for us to look at past successes in products that have solved similar challenges with technology. Web 3.0 will need to work like Web 2.0 as the industry rebuilds and heads toward decentralization. Whether it be an app, browser extension, or a browser alone there is this huge opportunity in front of builders today. 

As leaders in the industry, we at Momentum will continue to design & create technology solutions that open the doors for mass adoption. 

Interested in chatting about disrupting Web 3? Schedule some time or find me on telegram: @t0mc0h

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