Before this integration, crypto asset managers using custodians would have to manually withdraw their funds to participate in on-chain governance. With this announcement, Coinbase Custody is claiming the industry’s first fully-integrated governance solution. This integration allows clients to easily participate in Maker’s governance, like voting on stability fees, while assets are still secured in offline cold storage.
This new feature comes with MakerDAO’s recent announcement at DevCon V and the upcoming upgrade to Multi-Collateral Dai (MCD) in November. For those unaware, Maker’s launch of MCD introduces a multitude of new features including the Dai Savings Rate (DSR) and additional CDP collateral types.
With this, the Coinbase security team has designed a secure solution for allowing their clients to participate in on-chain governance without ever compromising their assets.
How does it work?
Coinbase Custody offers a world-class custodial solution for crypto assets held to the highest security standards. This includes cold storage and offline key-generation events.
While crypto is meant for “hodling”, many protocols have mechanisms for active participation in the network. MakerDAO’s on-chain governance is just one example of this. The challenge becomes that engaging with these protocols requires online, hot wallets that are prone to security risks. Hot wallets typically breach Coinbase and other custodial providers’ security standards and cannot be used to store client funds. Therefore, Coinbase’s security team designed an original system allowing users’ to actively participate in on-chain activities while maintaining the highest security standards.
Without going too deep into technical detail, here’s an overview of Coinbase’s Maker Voting design.
- MKR Tokens are sent to an internal proxy smart contract for voting. This contract is associated with a pair of addresses: (1) administrative address with a hot key and (2) a cold address with a fresh, unused cold private key.
- Using the administrative key, transactions are signed and MKR tokens are deposited into Maker Voting contract
- The administrative address is used to cast votes through the proxy contract.
- MKR funds are returned to the pre-determined cold wallet.
The security model was largely influenced by Coinbase’s previous integration with Tezos’ staking. With this, the security team at Coinbase Custody has done an amazing job at establishing a new framework for other teams to build out similar solutions. As active participation mechanisms among protocols and networks continues to increase, like MakerDAO governance or even Nexus Mutual‘s risk assessment, blending security with accessibility will begin to dominate the space.
Ultimately, this is just another move on the chessboard for Coinbase. With last week’s announcement regarding 1.25% APY on all USDC holdings, it comes as no surprise that Coinbase is expanding its offerings on in the DeFi space.
In the future, it will be interesting to see what other new features Coinbase will implement as new use cases emerge and DeFi continues to proliferate throughout the ecosystem.
Analyst at Bankless – one of the leading resources for open finance. Lucas is an active contributor to the DeFi ecosystem with appearances in other notable DeFi outlets including The Defiant and Our Network. He has years of experience working with dozens blockchain and token startups where he focused on token economics, marketing, and growth.