*The following report was written by Messari Hub Analyst(s) and commissioned by Qredo, a member of Messari Hub. For additional information, please see the disclaimers following the article.
The institutions are coming. Hedge funds and other early adopters are buying Bitcoin. Corporate treasuries including Microstrategy and Tesla now hold billions of dollars in Bitcoin on their balance sheets. ETFs are multiplying inCanada, Europe and evenSouth America. Greyscale manages over $20 billion in BTC. And this is just what’s public.
As fiduciaries, legally responsible for their clients’ investments, institutions must demonstrate that they have secured their assets under management and have controls in place to prevent unauthorized trading and withdrawals. In crypto, all control emanates from the possession of the private keys associated with the crypto holdings. Once a private key is stolen, all the assets are compromised: There is often no way to retrieve them, or recourse to protocols or wallets.
The use and care of private keys is fraught withrisks, even for crypto-native power users. As a result, private key management remains the biggest source of concern for crypto-asset managers. However most custody solutions are highly centralized, which has benefits (e.g. there is an institution to sue if something goes awry) but also drawbacks in increased counterparty risk and costs.
One of the biggest hurdles to more widespread decentralized trading of cryptocurrencies is the difficulty, centralization and costs of cross-chain swaps. Whereas it is simple to swap BTC for ETH on a centralized exchange (CEX), it is far from easy to do this in a decentralized manner. Despite many promising attempts, such as THORChain and Anyswap, for now the problem remains unsolved at scale. Once a holder is on any platform, be it CEX, custodian or blockchain, it is not trivial to move on. Want to sell on Coinbase when your assets are on Binance? Too bad.
Qredo, a decentralized custodian protocol, was born out of this struggle and addresses a number of problems for asset holders by offering:
Decreased reliance on centralized counterparties by decentralizing delegation of cryptocurrency asset management
Less dependencies on blockchain-specific settlement constraints / issues with atomic swaps of otherwise cross-chain assets on its own blockchain
Lower-cost transactions by encouraging more assets to live on their blockchain
At a high level Qredo is a decentralized custodian protocol that allows users to transfer any blockchain asset between one another using Qredo’s own stand-alone fork of the Tendermint blockchain. It comprises:
Qredo Vault / Multi-Party Computation (MPC) Cluster (see below): Generates, secures and provisions access to layer 1 assets. No private key needs ever be generated.
Watcher: Acts as a smart router between the Clusters, the Qredo Blockchain and Layer 1 Cryptocurrency nodes.
Qredo Blockchain: a stand-alone fork of the Tendermint blockchain.
Qredo believes it has the potential to create a full ecosystem of capital markets solutions such as trading and lending. Liquidity will be provided in partnership with some of the top crypto service providers, including investors, centralized lender Celsius and futures and options exchange Deribit. Partnerships with institutional traders and trading platforms allows for more flexibility in venue selection, ensuring best execution. In the current multi-chain and multi-exchange world, trading on any CEX requires first moving assets to that venue. On Qredo’s decentralized custody solution, assets can appear instantly on any of the participating exchanges.
Swaps between any two assets within the Qredo network are low cost, regardless of which blockchain the actual native assets live on. ETH for BTC or LUNA becomes a simple swap between two addresses on the Qredo blockchain rather than a complicated one involving multiple gas-intensive transactions to addresses on the native layer 1s. Currently these swaps are P2P, but a Qredo DEX is forthcoming.
Qredo is now live with custodial and transactional support for 15 tokens on their v1 mainnet, and recently raised $11 million to support their continued focus on providing a full-service “digital asset management infrastructure and product suite designed to unlock new opportunities for institutional investors.”
Technology
How is Qredo able to offer decentralized custody and low-cost transactions? It uses its own blockchain, built on a fork of theTendermint blockchain. Qredo’s first mainnet is secured by 24 nodes located in six Tier-4 data centres in six financial centres. This means that, for now, the chain is far from fully decentralized, though the plan is to move towards full decentralization over time. Eventually, validators on version 2 will be able to stake and earn QRDO governance tokens as slashing/incentives.
In securing custodied assets on their blockchain, Qredo chose not to use traditional multi-signature (multi-sig) technology, requiring the verification of “M of N” private keys to verify each transaction. Though popular, this method’s drawbacks include (1) transaction size (and therefore cost) increases with the number of signatories required; and (2) a reliance on smart contracts, opening up the architecture to hack risk.
Qredo uses a Threshold Signature Scheme (TSS), a special type of Secure Multiparty Computation (MPC) that is in turn a variation of Shamir’s Secret Sharing (SSS): Splitting private keys into multiple “key shares”, requiring approval of M-of-N of the part-private key holders to effect a transaction. When M of N signatures are collected, one private signature approves a transaction.MPC is used by many of the most popular centralized custodians, including Fireblocks and Bakkt Warehouse, but also decentralized protocols such as THORchain.
User’s key shares – offering ownership and access rights as long as the threshold is reached– are stored within the MPC nodes, and protected by security measures such as key rotation. Once secured on Qredo, any transfers within the Qredo network are very low cost, and custody is costless. The Qredo blockchain holds all the BTC, ETH, etc. natively and the chain allows settlement between Qredo addresses.
Qredo’s front end consists of a webapp that requires signing through a mobile app (PIN plus biometrics). A wallet’s administrator can create an organization account and authorize users such as managers, traders and other administrators. Each party can invite other wallets to join their trusted network and can view outstanding orders, account activity, inventories and whitelisted addresses. A separate trading and withdrawal policy can be implemented for additional security.
Currently, transactions are facilitated by the Liquidity Hub, a simple bulletin board where order URLs can be broadcast to a specific counterparty or shared to the full whitelist and, once accepted, are executed immediately and at very low cost. As of May 25, 2021, Qredo supported BTC, ETH, and 13 ERC-20 tokens including USDT and USDC.
Roadmap
Qredo recently completed a seed round of $11 million. It is no coincidence that Qredo’s early investors include some of the largest institutional traders and several of the largest centralized crypto platforms. The plan is for Qredo’s partners to offer lending, borrowing and trading services to replace the current bulletin board, as per below. One of the largest futures and options exchanges, Deribit is already working on a custom integration. A DEX AMM is also in the works. Users will be able to transact on any platform using Qredo instantaneously, rather than having to transfer collateral before execution. Other investors such as CMS Holdings, Wintermute, Kronos and GSR will be keen to add liquidity to the growing ecosystem.
Qredo acknowledges that their blockchain is far from fully decentralized, as is often the case with crypto platform v1s. With v2, Qredo has planned to move closer to its ultimate goal of full decentralization, with a native token, independent validators and governance by a decentralized autonomous organization (DAO).
The Future of Custody?
Qredo’s goal is to offer institutional crypto investors two solutions in one: An inexpensive, secure and decentralized custodial solution and low-cost cross-chain swaps and other DeFi services. The v1 platform is up and running, and further decentralization and ecosystem additions are on their way.
To be successful, Qredo will need to convince institutions that their blockchain – one that does not share Ethereum’s security, unlike upcoming layer 2s – is not only the appropriate home for crypto-assets but also the best blockchain for best execution. The recent investors – active and knowledgeable platforms and liquidity providers – offer hints as to where Qredo is headed, but time will tell what adoption will look like.
This report was commissioned by Qredo, a member of Protocol Services. All content was produced independently by the author(s) and does not necessarily reflect the opinions of Messari, Inc. or the organization that requested the report. The commissioning organization may have input on the content of the report, but Messari maintains editorial control over the final report to retain data accuracy and objectivity. Author(s) may hold cryptocurrencies named in this report. This report is meant for informational purposes only. It is not meant to serve as investment advice. You should conduct your own research and consult an independent financial, tax, or legal advisor before making any investment decisions. Past performance of any asset is not indicative of future results. Please see our Terms of Service for more information.
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