The age of rising cryptocurrency adoption marks crypto exchanges and institutions as the torchbearers of the digital asset movement. They are at the forefront, making crypto assets and related instruments accessible to many. In turn, they end up handling massive value for old and new investors through their services. The concentration of user-deposited crypto assets along with their own reserves and holdings increases the need for enhanced security measures to prevent untoward incidents like cyber attacks and hacks leading to theft of stored assets.
Hence, they implement protective asset storage and transactional measures to safeguard the funds in their custody. The sophisticated storage infrastructures that institutions implement utilize sundry checks over the flow of the assets within them, reducing the chances of ever-looming exploits from succeeding. They are applied over transactions between the multiple wallets that compartmentalize their storages.
Staying ahead of theft requires institutions to analyze market conditions constantly – the demand for assets and how it dictates user deposit and withdrawal patterns. Accordingly, they alter the quantities of the various crypto assets moving from highly secure to less secure parts of their storages.
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The Manual Approach to Conduct Wallet Operations
In bids to upkeep security, institutions maintain fractional amounts in their withdrawal hot wallets, considering the vulnerabilities they bring. As a result, they must replenish the wallets often to allow efficient withdrawal for users, especially during high demands. The constant monitoring of their balances and refilling of funds is undertaken manually, choking the scalability of enterprise operations. Unsurprisingly, many platforms find it hard to keep up with the growing cryptocurrency demand in the multi-chain climate.
The typical institutional storage infrastructure consists of a cold wallet controlled by the firm’s CXOs where most of the assets in its custody are stored. The number may differ for different enterprises, but most rely on cold wallets for storing about 85-90% of their assets. The remaining find themselves in warm and hot wallets. The warm wallet stores a big chunk of the remainder, enabling the repetitive filling of the hot wallet. Institutions also use hot wallets for their customers to deposit funds. So, conversely, crypto assets are swept to the cold wallet from the deposit hot wallet to store deposited assets securely.
The constant monitoring and movement of funds within enterprise storages add the needed complexity to prevent theft in the millions. The biggest exploits over centralized institutions occurred because their funds were clumsily stored in hot wallets, making them easy targets. While current storage infrastructures are designed to avoid such troubles, they bring different issues.
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For one, human arbitration in institutional storage operations can lead to fallacies like forgetting to replenish hot wallets routinely and mismanaging private keys and sensitive information, among others. Moreover, manually moving funds across enterprises is inefficient. The storage and liquidity maintenance practices followed by them are tumultuous, no doubt, but that is just the tip of the iceberg.
In practicality, the practices are amplified to scale for the several tokens from different chains interacting with enterprises. Therefore, they utilize multiple storage channels and wallets to accommodate multi-chain assets. Increased interaction during upmarket conditions can mean nothing less than nightmares for employees working to maintain the needed liquidity.
Another issue with enterprise storage is that the several wallets in their ecosystems are often not natively interoperable. They are manufactured by different entities, do not support the same chains, and are configured differently – MPC and multisig wallets, for instance. Composing them into a functioning system is no easy task and involves assembling them robustly to prevent malfunctioning. Regardless, combining many non-interoperable elements and forcing interoperability breeds several points of failure that are ripe for exploitation.
Intuitive Wallet Functionalities Are Crucial for Institutions
Automating transactions for refilling hot wallets and sweeping excess funds from them is the way to go for institutions. Intuitive wallet functionalities can remove the pain points associated with manually observing balances and executing transactions. A well-designed algorithmic solution to securely replace manual processes is the need of the hour for popular institutions witnessing surging usage.
Platforms like exchanges are the initial point of contact for users making their way to crypto markets for the first time, with the numbers of users entering sharply increasing. Beyond that, well-known institutions witness considerable usage from regular users even during lull market phases. Crypto bull markets are a different story altogether, with transaction volumes reaching their peaks.
Manual wallet maintenance stands no chance in such scenarios. Related teams play a game of catch-up, trying to meet user demands. Even otherwise, employing manual tactics during phases with less transactional demands is unsuitable and unresourceful due to issues like employee costs, phishing attacks, and other significant hurdles.
Liminal’s Solution to Enhance Wallet Functionality
Liminal’s wallet infrastructure solution tackles the shortcomings of institutions’ manual asset storage operations. The avant-garde storage solution provider implements intuitive algorithms over a layer of institutional-grade security, providing optimized storage of over 1,800 assets originating from 18 supported blockchains.
Essentially, Liminal employs algorithms that automate the hot wallet refilling and sweeping processes. The Smart Refill Wallet, Liminal’s warm wallet application, actively monitors the funds in the enterprise hot wallet and initiates refills when needed. The refilling transactions are signed ahead of time in batches by enterprise personnel through multisig configured wallets. At the time of refills, the Liminal Signer – a Smart Refill Wallet private key held by Liminal – authorizes the transactions automatically upon policy verification, pushing liquidity to the hot wallet.
Enterprises set mandatory policies that touch upon criteria like transaction limits, the number of transactions in each batch, and the cooldown periods between subsequent transactions. Moreover, the Smart Refill Wallet can only transact with one hot wallet through a whitelisting mechanism. Liminal implements these factors to protect enterprise funds from ever being accessed by bad actors.
While these frameworks govern fund flow to the hot wallet from the Smart Refill Wallet, Liminal’s algorithms also relieve the deposit hot wallet of the funds accumulated from users. The Auto Sweep feature moves hot wallet funds to cold storage regularly, keeping them away from the intrusive hands of cybercriminals. Liminal’s automated wallet maintenance functionalities offer the ideal solution for institutions tired of complicated and overly redundant processes. To secure the assets in your trusted custody and benefit from the efficiency of Liminal’s automation, request a demo with us today.
by Liminal
