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December 1, 2022

2023; DeFi and Data; Binance; CryptoAM awards

Welcome to Swarm Markets’ media memo. This weekly update provides comments from Swarm Markets’ co-founders, Philipp Pieper and Timo Lehes, and head of PR and communications, Katie Evans, on key industry news that has caught our eye, plus our own developments. 

Comments available on the following news items:

  • DeFi trends for 2023
  • Is data collection in DeFi wrong?
  • Binance PoR system is flawed
  • Swarm celebrate crypto award win

The DeFi trends to watch in 2023

As 2022 draws to a reasonably tumultuous close, there are some key trends to watch in the year ahead. 

This year has been a watershed moment for DeFi, and the wider crypto sector. We’ve had not one but two market flashpoints that have taken out some big names in the space. But this will clear the way for the stronger, better organised and more sustainable innovators in the coming years.

One of our key trends to watch springs directly from the FTX saga, but was already emerging in relevance – self custody. Getting people and companies familiar with the notion of self custody will take time and is a big educational undertaking. 

Businesses have grown based on custodian models and entire populations are used to having their money kept safe by someone else. 2023 then needs to be the year that the sector promotes and delivers realistic self custody options to holders. 

We also see the growth of the attestation sector as a key area to watch. Bringing real world assets (RWAs) on chain and giving owners confidence their assets are safe is essential to the progress of the sector. Trusted third parties, like the big four, have a role to play in the verification of real world assets for the purpose of creating digital twins. People need confidence with their collateral, or else providers will struggle to entice holders to participate. 

Finally, we see 2023 as a big year for the securitisation of tokenised assets. This is a key facility for institutional traders and retail investors to be able to access digital assets, within existing payment and trading infrastructures. Securitisation will be important for making the process of registering, listing, buying and selling crypto assets seamless and secure. 

DeFi data collection should be opt in only

Recent revelations about data collection from platforms sets a bad precedent for the sector, and in the wake of sharp practices in Web2, will just serve to put off potential users. 

Of course DeFi platforms need to acquire information about users – but this should be on an opt-in basis and in line with regulatory needs. Retroactive policy tweaking, surreptitious collection and opaque user tracking is fundamentally not going to help the sector move forward and instill trust in its users. 

Unfortunately, data mining has been a hallmark of Web2. The advent of Web3, and with it crypto and DeFi, was supposed to do away with these pernicious practices, so the continued use of these tactics isn’t going to reassure users who need access to services but don’t want to be intrusively watched. 

Any data collection should be done via clear and transparent opt-in. This especially applies to the decentralized space, where you alienate audiences quickly if you overstep in the data arena. Even if these data practices are ok elsewhere, applying them in this vertical could be considered “tone deaf” to the specific needs and concerns of this category.

Binance proof of reserve system is not the answer

Binance has announced a new Proof of Reserve (PoR) system, beginning with its holdings of bitcoin. But the idea just papers over the cracks in the current ecosystem and isn’t going to provide the reassurance that Binance says it will.

There are considerable flaws in the design of PoR. While the system might provide a snapshot of those reserves, there is no system in place to show that those assets aren’t being used as collateral elsewhere. 

A PoR system also only provides a snapshot of one moment in time. Who is to say that those assets will be moved elsewhere once the ‘proof’ is delivered? It relies on too many caveats and still puts the power of custody in the hands of the platform in question. 

The only real way of providing proof of the existence of collateral and assets is Proof of Redemption. If the owner can take their assets back, then those assets exist. This was fundamentally not the case with major exchanges that collapsed, with the cabinets found to be bare as users attempted withdrawals.

But we’re seeing an organic shift toward self custody as users realise the best place for their assets is in wallets under their own control. This process will accelerate as providers realise it is in their best interest to facilitate self custody rather than promote centralised solutions where users are never quite sure if their assets are truly safe. The damage in trust is done, and needs to be rebuilt in new ways, not just more of the same. 

Swarm celebrates crypto award win

Swarm is very pleased to have won “Outstanding Contribution to DeFi” at the prestigious City AM CryptoAM Summit and Awards 2022 last week! 

The award was won with some major other crypto projects on the shortlist, including Coinbase and Aave. The positive feedback from the judges made us extremely proud of our ongoing efforts to improve and adapt DeFi to a new combined future with TradFi. 

The judges recognised Swarm’s regulated approach to DeFi in anticipation of merging TradFi into the blockchain ecosystem in the years ahead, with the onboarding of real world assets and institutional participants a key goal for the future of the sector, which we are spearheading.