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Layer-2s Could Prepare Crypto for Big Money, Says Komainu CTO Robert Johnson

Last Updated April 26, 2024 11:28 AM
Teuta Franjkovic
Last Updated April 26, 2024 11:28 AM

Key Takeaways

  • Trust and security are key for institutional adoption of digital assets, says Komainu CTO Robert Johnson.
  • Layer 2 solutions and maturing protocols should enhance scalability and security.
  • Bridging the gap between digital and real-world assets requires collaboration.

The financial services sector is experiencing a shift towards the acceptance of digital assets, driven by a convergence of trends.

While more businesses and investors look to buy crypto, they are looking financial institutions for help.

Digital Assets: Secure Custody Builds Trust for Booming Market

For digital asset trading to fully flourish, investor confidence in their security is essential. CCN caught up with Robert Johnson , the CTO and interim CEO at digital assets custodian Komainu,  to discuss how effective custody is pivotal for both institutional and individual investors in this evolving market.

Johnson claims that institutional adoption of digital assets is at a critical stage in which businesses understand the opportunity for digital assets, and establishing trust, transparency, and security are the keys to unlocking it.

He said:

“Digital assets are complex and while there is a major financial opportunity, the space itself is heavily technology focused. I have had the benefit of working on the buy and sell-side in financial services as a technologist. Therefore, I understand the complexities of client requirements, both from a financial perspective but also their technological and security needs, as well as the intricacies of the technology stack.”

L2 Solutions Unlock Institutional Potential in Digital Assets

Johnson underscores the significance of Layer 2 (L2) solutions in the institutional adoption of digital assets. He points out that while L2 solutions provide necessary scalability enhancements for specific applications, they have not always met the broader needs of institutions. However, advances in technology, such as sharding, are set to further enhance Layer 2 scalability.

Johnson also discusses the maturation of digital protocols. He said that as institutions begin to use them, there is a compounding effect on the efficiency and security on the likes of proof-of-stake blockchains. As these approach a critical mass, their efficiency and security improve, leading to more people using them. Johnson also argued the initial inertia related to investments and computing resources was becoming less of an issue.

Additionally, Johnson addresses the past association of digital assets with criminal activities. This has put larger institutions off adopting crypto.He says that, as regulations strengthen and the legitimacy of digital assets gains wider acceptance, this cycle encourages greater adoption and contributes to the overall robustness of the asset class. He emphasized the transparency and auditability of on-chain transactions. These, he says, help enhance the trustworthiness and appeal of digital assets in institutional settings.

Infrastructure Development Key to Tokenizing Real-World Assets

Johnson discussed the crucial steps needed to bridge the gap between digital assets and real-world assets, highlighting the unique infrastructure demands of each. According to Johnson, while the underlying technologies for managing digital and real-world assets differ significantly, the integration process for digital asset custody and trading needs to be familiar and accessible for traditional financial institutions.

He emphasized that for the crypto market to effectively support the integration of tokens with tangible assets, key infrastructure developments are vital. This includes creating a technology stack that is tailored to the distinct requirements of digital and real-world assets yet is intuitive for traditional financial entities accustomed to conventional systems.

Johnson pointed out that as these two sectors continue to merge, it will be essential for traditional finance (TradFi) institutions, digital asset services, regulators, and tech innovators to work together. This will help address the challenges of this integration. It should also help the digital asset ecosystem reach its full potential. Such efforts will be vital in paving the way for the next phase of adoption.

Challenges of Integrating Traditional and Digital Asset Markets

Discussing collateralized products, Johnson points out that assets like bonds pose challenges. These assets can turn into different token forms. This means they need infrastructure that can support tokenization and management.

On the subject of clearing houses, Johnson claimed institutional market participants expect a level of transactional security comparable to traditional markets to mitigate delivery risks. Therefore, there is a need for robust clearing and settlement mechanisms specifically tailored to the markets’ needs of digital asset markets. Developing efficient clearing house solutions is key to promoting liquidity. This could reduce both delivery and counterparty risks, and also build trust.

Lastly, Johnson talked about the integration of tech stacks. He noted the significant differences between older financial systems and digital assets. While traditional systems require frequent reconciliations and operate within set regional trading hours, digital asset platforms offer continuous, global trading and, he says, are built on transparency. The meeting of the traditional and digital worlds poses several challenges. New ways of doing things need to happen to reconcile differences in settlement cycles, data management, and custodial practices.

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