Let’s face it, crypto still has a reputation problem and rightly so as of now, but 2023 is the time to change that at the root level. Recent events have only accentuated a lack of confidence in the space on the part of both businesses and consumers. The worst part is that this has been due to counterparty risk, a problem that cryptocurrencies are meant to avoid by design.

Paulina Jóśków is Ramp’s director of partnerships. This story is part of CoinDesk Crypto 2023 package.

In 2023, Web3 projects will take on the responsibility of educating new users about self-stewardship and creating better gateways for them to enter the space safely. All the necessary tools are already available, market sentiments are temporary, and fundamentals are still strong.

Counterparty risk is unnecessary

“Counterparty risk is the probability that the other party to an investment, credit, or business transaction will default on its part of the bargain and may default on contractual obligations.” (“Counterparty Risk.” US Office of the Comptroller of the Currency, 2022).

This type of risk can only exist within a centralized infrastructure. Typically, this will happen when an escrow service becomes insolvent or goes out of business, leaving its clients without access to their funds.

Time and time again we have seen how different types of escrow services have made this risk a reality. From Mt. Gox in the early days of crypto, to FTX, Celsius Network, and Three Arrows Capital, all of them failed to meet their obligations to users, and not to any user. Many of those affected were newcomers to the space who simply did not know that self-care alternatives are available.

See also: The 4 Horsemen of the Cryptocalypse

In decentralized finance (DeFi), counterparty risk is resolved with code, and self-custody is the norm to make sure users are not vulnerable when those in charge of these services are being reckless. This is why the spirit of decentralization will remain central to the development of the space in 2023. If decentralized infrastructure and self-custody were the default mode of how new users are welcomed into the space, perhaps cryptocurrencies would have a different reputation.

the story continues

Yet here we are

There is currently no reason for crypto and Web3 entry points to be plagued with this problem. Self-custody onramps are already up and running with countless dapps and wallets to put users in full control of their digital assets from onboarding to offloading.

However, most users still make their first digital asset purchase through an escrow service. This is simply due to their familiarity with existing Web2 banking and fintech applications. They assume that crypto onboarding works similar to any other online banking operation where the user journey is simply to sign up and entrust their assets to the people running the server.

What they don’t always understand is that they don’t actually own their assets in these cases, and most of these services don’t operate under the same guarantees and legal protections that a traditional financial firm would.

Unlike a bank, custodial services in crypto are not insured and many are registered offshore. In the event of a hack or bankruptcy, users will most likely lose all their assets and no customer service representatives will respond to explain what happened. Some custodians have built their businesses on the basis of this information asymmetry.

Incorporation of self-custody as the new standard

More education on the existing decentralized infrastructure and the incorporation of self-custody is the first step to solving this problem. A shift towards DeFi is something that even custodians such as large centralized exchanges have recognized will happen once the knowledge gap between end users is closed. In the new year, this process will be accelerated to effectively address the current mistrust in the industry.

Projects providing early user interactions with the crypto space are in a unique position to guide new entrants to best practices and ensure they are not exposed to unnecessary risk. In addition to educating users on their particular use cases, they should emphasize the need for self-custody and make sure they know how to stay in control of their assets at all times.

See also: Worried about a financial crisis? Enter – Own Custody.

By ensuring that users have self-custody embedding options readily available from within their own services, Web3 projects can help the industry achieve more secure standards.

There are also practical user experience (UX) improvements that come from an industry-wide focus on incorporating self-custody. Once users work with one of these services and pass the necessary verification processes, they can buy cryptocurrency with fiat from a variety of other dapps that have integrated that particular self-custody onboarding solution.

Another improvement has to do with privacy. Unlike traditional exchanges, the business model of these on-ramp services does not revolve around data collection and monetization. Many remove instances where users are required to share any kind of data. This allows for further mitigation of risks related to hacking and data leaks and means that the space remains true to one of its core promises.

These are all things that every new user should and will know as Web3 continues to evolve in 2023. It’s time for decentralized, self-guarding user journeys to become the norm.