Why On-Chain Crypto Investments Are Superior to Traditional Crypto Investments (Part 1 of 4)
“Blockchain is an evolution of the hundreds-of-years-old ledger system that relies on a trusted, centralized authority to maintain records and balances — which is leveraged by banks and nearly all other accounting-related businesses to this day.”
“Blockchains create a triple-entry [ledger] from the old double-entry [ledger] and the ledger self-audits and writes on-chain. It’s an immutable ledger entry that can never be altered.”
Anonymous
How Traditional Crypto Investments Work and Their Shortcomings
Understanding the differences between traditional crypto and on-chain crypto is fundamental to mitigating risk and locking in growth strategies.
Traditional investments in crypto tokens are handled roughly the same way as investments in stocks. An investment company receives the customer funds in fiat $USD via a bank wire transfer. Depending on which crypto token assets are being offered by the investment company, the $USD is used to purchase those assets.
Crypto assets can be an index of multiple tokens or individual single tokens. Purchasing these assets is handled privately by the crypto investment company and the tokens are stored using the company’s custodial service. Custody of assets can also be outsourced to a third-party custodial provider. The customer percentage, or equivalent $USD allocations of tokens they have purchased, is likely to be kept in a private database server inside the company. The downside is there is no public visibility of custody or the database server.
Customers have no direct or auditable method for verifying which tokens were purchased. The investment company can provide an online portal to show allocations, but this data is populated by the investment company. Paper statements of customer allocations are provided monthly or quarterly, showing the balance of assets held for each customer. The customer has to trust the investment company’s word that they purchased the allocations on their behalf. The investment company is audited by a third-party law firm, but that only takes place quarterly or annually.
On-Chain Crypto Investments - A Better Way
In contrast to traditional crypto investments, crypto assets that are purchased and held in custody on-chain provide transparent, verifiable, and immutable visibility for the customer.
Transactions are executed via the blockchain network (i.e., Ethereum blockchain) using a public ledger that is open and fully transparent. Blockchains are permissionless, open ledgers that any person can verify themselves using a public blockchain explorer (for example, the Ethereum blockchain explorer).
Anyone can enter a transaction ID or Ethereum public address and the explorer displays the complete transaction history.
Here is an example: https://etherscan.io/address/0x1EEec291892001eeb6feC13Fa3EfeA125D234B1c
This shows the transaction history of the ethereum address - 0x1EEec291892001eeb6feC13Fa3EfeA125D234B1c. This address was chosen at random and showed a balance of 0.191587941925375305 Ether.
For security, the identity of the person who owns the address is not known; this is by design. The address is encrypted with 256-bit ECDSA (Elliptic Curve Digital Signature Algorithm). The Ethereum blockchain network of nodes (computers) is global and fully decentralized. A complete copy of the transaction history of this Ethereum address is kept by each of the blockchain nodes.
Ethereum Smart Contracts
An Ethereum smart contract executes the purchasing of the on-chain index of tokens. The $ETH token is used as input into the smart contract. This is after the investment company converts the customer-wired $USD into $ETH tokens. The smart contract transaction is on the blockchain and is publicly viewable by anyone who knows the transaction ID or Ethereum address of the smart contract.
Here is an example of a transaction: https://etherscan.io/tx/0xad43cafb3c1538ee4ee417dd6fcc031fa2371a7250bebe81e7e5e6c34495ca31
This shows the “From” address, that the transaction involves “$USDT stablecoin”, and the transaction is a “Success”. These transactions are permanently stored on the Ethereum blockchain distributed ledger. The blockchain is immutable, publicly viewable, and verifiable. The customer can view and verify their token allocations and transaction history using this public explorer.
While the on-chain investment solutions will provide a portal and quarterly statements for the customer, similar to a traditional investment company, this info is also available directly to the customer by examining the blockchain.
This blog is the first in a 4-part series. The next blog in the series is Decentralized Exchange (DEX) vs. Centralized Exchange (CEX).
