The Future of Crypto-Powered Finance and DeFi | Linen Blog


How can you avoid writing down seed phrases and private keys?

A combination of several technological advancements made it possible to design secure next-generation self-custody wallets, including:

  • Smart contracts that live autonomously on a blockchain executing predefined code,
  • Multi-party computation (MPC),
  • Social recovery,
  • Cloud storage, and
  • Hardware security modules as a wallet recovery mechanism.

This next generation of wallets (accounts), which lives on blockchains, forms the foundation for new types of software companies (organizations) that do not touch user funds. They enable users to access crypto-powered financial services and applications, including investing, trading, earning yield in DeFi, and borrowing. These are the ones we know of today, but many more use cases will present themselves over time.

Users of these wallet apps do not bear the risk of the wallet software developer disappearing because users have access to wallet recovery mechanisms on their own. From the usability perspective, wallets that do not require writing down seed phrases for wallet recovery are much easier to use than traditional financial services apps.


How will self-custody wallets affect broader financial services and financial technologies?

The paradigm shift in how software companies provide access to crypto-based finance is a net positive for consumers, the emerging field of decentralized finance, and wallet app providers.

Benefits for consumers:

  1. Access to the entire range of decentralized financial applications. For example, the ability to buy, sell, trade, hold cryptocurrencies, collectibles, digital art, and other crypto assets powered by public blockchains.
  2. A direct relationship between users and blockchain-based applications where early users are rewarded for being customers. Ownership is in the form of a token (crypto asset), and it allows users to vote on how these platforms and applications are shaped. For example, Uniswap rewards its users with its $UNI token for providing exchange liquidity. The liquidity pool Compound rewards its users with the $COMP token for using the platform. All you need is to interact with these platforms using your private key.
  3. Compromises no personal identifiable information. Self-custody wallet providers are not typically targets of hacker attacks aimed at stealing personal identifiable information because users do not provide personal identifiable information to wallet providers. If users purchase crypto with fiat, they usually provide this information to regulated financial institution partners who provide services that involve fiat exchange.
  4. Unlikely to have crypto assets stolen. Since self-custody wallets do not contain user funds, self-custody wallet providers are not usually targets of hacker attacks looking to steal user funds.
  5. Access to a variety of crypto-powered financial applications. Most self-custody wallets can be linked to numerous DeFi crypto services or accessed from multiple interfaces with no additional sign-up. This is a big deal since new investment platforms and crypto assets appear every day, and no single company can integrate even a fraction of them. Users can easily plug their wallet or export private keys from another interface and have all transaction records in place on a new interface.
  6. Greater access and inclusivity. Residents of countries with less developed financial markets and less democratic governments have access to the global crypto markets, crypto dollars, and crypto savings. They can finally build liquid wealth, which does not exist in many parts of the world today.

Benefits for developers of decentralized applications:

  1. Direct interaction with end-users via their self-custody wallets fosters decentralization, voting participation, and engagement with blockchain-based services and protocols.
  2. Prevents the concentration of voting power on centralized exchanges, which can lead to voting manipulation and attacks on public protocols.
  3. Mitigate the risks involving large quantities of tokens in circulation from being stolen from centralized exchanges due to hacks or rogue exchange operators.

Benefits for developers providing self-custody wallet apps:

  1. Since wallet providers do not hold user funds, they are not regulated as financial services companies. Instead, wallet developers provide software to custody private keys for end-users. In a similar way, software companies, such as 1Password and LastPass, provide a secure environment to store and manage your passwords. Not being regulated as a financial services company drastically cuts costs, which can be passed on to end-users or reinvested in product improvements.
  2. Building on the public blockchain infrastructure cuts operating costs since there is no need for building proprietary financial products or engines for transaction settlement. Everything is done on public blockchains and in DeFi protocols. This is a huge long-term competitive advantage compared to centralized crypto operators like exchanges or financial services companies.
  3. Self-custody software wallet providers become global by definition because they do not have to rely on the traditional financial system or seek government approval. Regulated financial partners in the appropriate jurisdictions typically provide the fiat on-and-off ramps for users of self-custody wallets.

Companies that develop new-generation self-custody wallets and enable access to crypto finance essentially become security-first software companies, focusing on identifying threats and mitigating them.


The future for self-custody crypto wallets

The crypto industry has reached the point where there is much more clarity now than 1–2 years ago. Based on my own industry observations and by talking to founders of self-custody wallet apps, here is how I think crypto finance and DeFi will shape out:

  1. Self-custody will become the primary method of custody of crypto assets. And by extension, it will be the primary method of interacting with crypto-powered finance and DeFi for consumers.
  2. Self-custody wallets will work cross platforms and natively support mobile apps, desktop apps, and web platforms. Smart contract wallet design makes this possible. It is impractical for most consumers to manage multiple wallets, each with their own backup and recovery mechanisms. Hence, consumers will stick with one “main” wallet provider. However, it does not mean that individuals will be locked in one wallet provider since the wallet lives on the blockchain and consumers can always switch to alternative web interfaces.
  3. Wallet apps will aggregate retail liquidity and channel it to various liquidity pools on layer 1 and layer 2 blockchains and scalability solutions. Fintechs like Credit Karma, Wealthfront, and Robinhood aggregate leads and liquidity and send it downstream. The same will happen in DeFi, but it can be done much easier because liquidity can be programmed and sent downstream without permission. While I was finalizing this post, the go-to DeFi wallet for the tech-savvy, MetaMask, announced getting into the supply side liquidity aggregation. In September 2020, MetaMask surpassed 1 million monthly active users, more than all the other DeFi protocols and aggregators combined. The majority of MetaMask users will be swapping tokens in the wallet without needing to go to individual platforms, while knowing that they will get a fair price. As a matter of fact, consumers value convenience and trust of their primary financial app and are ready to pay for this convenience.
  4. Wallet apps will start moving down the stack, providing DeFi yield strategies and forming their own liquidity pools to capture greater economics. This will be the result of the liquidity aggregation I outlined above.
  5. There is a good chance that yield strategies and liquidity pool smart contracts, which the wallet app is integrated with, will be heavily managed by the wallet app users. And the same for exchange liquidity pools. Imagine MetaMask issuing tokens and its users have a say in how the fees should be set, what new use cases should be supported, and may be even how treasury should be spent. This will increasingly look like a coop or union.
  6. As long as the wallet can connect to decentralized protocols, either natively in the app or using third-party connectivity solutions, it will be easy to entertain novel use cases and have fewer reasons for users to switch wallets.
  7. Wallet apps will provide authentication or/and identity services to third-party apps. This is the hardest task to achieve, and I am less certain how this will happen, but it will happen. It’s just a matter of time.

Self-custody of crypto sounds great. What’s the catch?

Today, blockchain-based applications are still in the experimental phase. But DeFi is growing rapidly with more than $10 billion of crypto assets supplied to various smart contracts, according to DeFi Pulse as of the end of September 2020. Examples of some of the issues that crypto finance is facing today:

  1. Scalability. Ethereum, the leading smart-contract platform where most DeFi financial activities occur, has reached its capacity and transactions are expensive, pricing out retail investors. Sooner or later, scalability issues will be solved by the Ethereum core developers, dedicated Ethereum scalability teams, and developers of other blockchains that aim to provide similar services on other blockchains.
  2. Privacy. Most transactions on public blockchains, such as Ethereum and Bitcoin, are traceable to the wallet that originated the first transaction. If someone sends you crypto assets or you send crypto assets to someone, the other party can view your wallet balance and all transactions coming in and out of the wallet. This is viewable by anyone using blockchain explorers like Etherscan. However, there is no name attached to your address on the blockchain. It is expected that privacy solutions will be implemented, and senders and receivers will have the option to send private transactions.
  3. Technical Risks. Technical risks should not be underestimated in DeFi. There is no assurance or guarantee that something will not be hacked or exploited. Time is needed to test the systems. These technical risks possess a systematic risk for the entire crypto industry. Users of centralized exchanges and hosted wallet operators are exposed to this type of risk as well. This is either directly, through purchasing yield sourced through DeFi smart-contracts, or indirectly, by holding DeFi crypto assets.


At the end of the day, consumers need to find the utility in what crypto-powered finance offers, be it earning yield, accessing crypto dollars in countries with unstable banking systems, sending crypto dollars to a friend for last night’s pizza, swapping one crypto asset for another, or simply safely storing your crypto wealth. Decentralization, new applications, and self-custody are means to get to that utility and value.

The new generation of self-custody crypto wallets, which do not require writing down seed phrases for wallet backup and recovery, lay the foundation for how consumers will have relationships with the emerging crypto-powered finance. These wallets provide a secure way of storing various crypto assets and can be used with multiple DeFi investment platforms and applications. Crypto finance truly enables a customer-centric approach because users are not locked into one platform and can exit at any time by switching to a new interface, while preserving all their transaction records. Linen’s goal is to empower individuals to build wealth with DeFi and have alternatives to traditional investment options, regardless of where they live.

Linen is making this a reality by starting with a simple use case: deposit the stablecoin USDC to the Compound liquidity pool to earn interest. We aim to provide the easiest onboarding experience for those who are new to DeFi and crypto finance. We will expand our use cases from here by providing a multi-asset wallet for all your crypto assets with native integrations of DeFi yield and exchange pools. Linen Wallet is in private beta testing now, and from time to time, we invite additional testers. If you are an iOS user, download the app (U.S. App store only at the moment) to get on the waiting list so that we can invite you to our beta test.

A bonus for those who read the entire article: We are also running a Community Program on Republic for early members of the Linen community. All the details about the program are on Republic. Due to certain legal infrastructure constraints of our partners, the Community Program is open to U.S. residents only.