Self Custody and the Growth of Web3
What we can learn from Reddit's success
TLDR:
Self-custody is important, but it’s not a good onboarding experience
Reddit’s digital collectibles onboarded millions of users to crypto without requiring them to self-custody
Brands need to balance user security with ease of use, and having a custodial solution for their users can help
Web3 natives and crypto maxis will all remind you the age old mantra:
“Not your keys, not your coins”
This means that if you do not own the private keys for your crypto wallet then the coins within them are not truly yours and may be used on your behalf. The most recent example being the FTX scandal where they commingled their clients’ crypto with their own hedge fund Alameda’s crypto, and now we’re not quite sure how much crypto is even left over.
While this mantra is a genuine fact, and one I’ve found myself repeating a lot over the years, it doesn’t quite tell the full story.
Self-custody has risks that most users would prefer to avoid
Most internet users are not as technologically savvy as many of today’s Web3 participants and even today’s early adopters are prone to making mistakes and losing their crypto and NFTs.
We’ve seen countless hacks and phishing scams where people have lost highly valuable BAYCs and other blue-chip NFTs, and times where nobody has acted malicious, the person has simply misplaced their seed phrase and lost access to their crypto forever.
Understandably, this ability to lose everything is a high barrier to entry for most normal people.
Enter Reddit.
They introduced “digital collectibles” to their platform, which under the hood are actually just NFTs living on the Polygon blockchain. It was a huge success and they onboarded literally millions of users into crypto!
Blockchain doesn’t need to be a feature
The way they did this was to create crypto wallets for their users within the platform and store the NFTs for the users until they wanted to pull them out.
This was a real trojan horse because most Reddit users did not even realise they were creating a crypto wallet or interacting with anything related to crypto. Reddit let each user create their own individual “vault” (ie. crypto wallet) to store their “digital collectibles” (ie. NFTs) for them.
This was nothing short of pure genius and a great UX decision. Users shouldn’t care what the underlying technology they are interacting with is, they should only care about the utility it brings them.
As we look to the future of the industry and how to grow the market further we should look at excellent examples and case studies like Reddit.
Companies and users can benefit from custodial solutions
When speaking with companies and clients I have noted the benefits of custodying digital assets for theirs users in improving usability and keeping things simple.
From the perspective of their users they can be blissfully unaware that they are holding or interacting with NFTs until it becomes important for them to take self-custody. For example, for Reddit users it became important when they realised that they could sell their NFTs on the secondary market and make a bunch of money.
For the company they have the benefit of being the entry point for the user into the crypto space. They get to own the users wallet and own the users assets, and there’s huge value in having potentially hundreds of thousands of dollars worth or even millions of digital assets within their platform that they can leverage. Nonetheless there’s also large risk that must be appropriately weighed up.
The ability to self-custody crypto and NFTs is an important benefit of the technology. However, for most, they will be more than happy to keep most of their assets custodied by reliable and regulated entities just as most people do with their banks!
So when thinking of creating a new product leveraging Web3 technologies its important to consider the potential benefits, especially in ease-of-use and onboarding, in having a custodial solution.