Prioritizing Custody in Trading Platform Evaluations
The way traders evaluate trading platforms is often backwards, prioritizing fees, available markets, leverage, and interface over custody. However, custody is a crucial aspect of choosing a platform, as it determines who holds your assets in case of an operator failure.
Custodial venues record a balance on their private database, which can be enforceable only if the business is solvent, honest, and legally reachable from where you live. This means that customers may join a queue governed by the insolvency law of the jurisdiction of incorporation in case of an operator failure, often after withdrawal suspensions have been implemented.
Self-custody platforms, on the other hand, guarantee no third party can prevent users from moving their assets, as no one holds the key. However, self-custody also means there is no recovery for lost keys or mistaken transactions, and users must be aware of smart contract risk, which replaces counterparty risk.
Hybrid designs have emerged to address custody risks, matching orders off-chain while settling positions on-chain, where the user retains control. This approach addresses custody risk but does not make the matching engine transparent, remove operator discretion, or decentralize governance.