Ledger is one of the most prominent crypto wallets in the blockchain world. And it’s among the wallets that users have turned to during this major cryptocurrency winter.
The collapse of FTX and the subsequent market action caused large net outflows from centralized exchanges, since many users moved their funds to personal wallets, also commonly referred to as “non-hosted wallets.”
In addition, while the trend was not as pronounced as suggested by some, and probably did not signal a mass exodus from centralized exchanges (CEXs), in reality an increasing number of users were opting for self-custody and turning to DeFi protocols to conduct activities such as trading and lending.
Ledger volumes soared after the collapse of FTX
Following the collapse of FTX, Ledger encountered some problems due to massive outflows from exchanges. In fact, the company encountered massive utilization of their platforms and faced some scalability issues.
This is what Charles Guillemet, Chief Technology Officer of Ledger, confirmed on Twitter. In fact, Guillemet explained that the fear caused by FTX prompted a large number of users to withdraw their cryptocurrencies from centralized exchanges and then move them to Ledger.
“After the earthquake caused by FTX, there has been a massive outflow from exchanges towards solutions that offer more security and sovereignty, such as Ledger.”
More specifically, Ledger had first reported problems with its wallet around early November. Due to overloaded servers, Ledger Live’s performance was heavily degraded.
In fact, the company confirmed that it had identified problems when connecting to the My Ledger tab, or performing a Genuine Check, while assuring that all customer funds were safe. The problem was promptly resolved after about an hour.
Thus, within a few days, Ledger witnessed particularly high volumes. Traffic increased significantly over time, even without major industry events.
Big incidents always drive large numbers of users to use the service; indeed, Ledger also witnessed spikes in traffic following the Celsius failure and the Solana hack.
Guillemet says Ledger Live has also experienced an unusual load on the service for device management, likely to be attributed to users upgrading their hardware wallet after a long time, or using a new device for the first time.
Josef Tětek, an executive at hardware wallet company Trezor, had used the occasion to stress the importance of managing one’s crypto-assets independently:
“The only way to avoid these incidents is to understand that self-custody is a necessity. It is not an option, but a real necessity.”
Although self-custody is not without risk, many in the crypto industry, including Paolo Ardoino, chief technology officer of Tether and Bitfinex, recommend that users store their cryptocurrencies inside cold storage devices.
Increased flows to crypto wallets: why? Chainalysis’ report
The increase in flows from CEXs to personal wallets is almost always a consequence of extreme market volatility or falling prices.
However, what separated this latest instance from previous ones was the fact that, this time, institutional money led the charge.
Whether individuals with large holdings, native cryptocurrency investors or traditional finance players, analysis of transaction sizes suggests that large holders are leading the way in the movement of funds from centralized services to personal wallets.
This raises new questions about how the industry can best equip institutional investors to guard their cryptocurrencies and use DeFi safely.
Users usually move cryptocurrencies from CEXs to personal wallets when the market is turbulent, including new institutional users. In fact, usually any major spike coincides with a period of market volatility and a drop in asset prices, often with a single identifiable cause.
In any case, the movement of funds from a CEX to a personal portfolio can mean several things. Many would suggest that it signals the fact that users are concerned about the solvency of their CEX and are moving their funds to a personal wallet that they control directly to ensure that they do not lose access to their funds.
This is probably true in many cases. In others, users could just move funds to a personal wallet and then move them back to another CEX or to a DeFi protocol. In fact, both of these options would allow them to continue trading or perform other transactions, such as contributing to a loan.
Regardless of the specific motivations, the behavior is true: most spikes in flows from CEXs to personal wallets are triggered by market volatility. However, what has changed is the composition of users who bring these crisis-driven withdrawals to personal wallets.
The trend is not perfectly linear, but overall and over time, institutional funds have made up a larger share of movements from centralized exchanges to personal wallets. This is the case for flows from CEXs to personal wallets in general, and not just during periods of high activity or volatile market conditions.
Overall, as institutional adoption has increased, these investors have taken an increasingly important role in the movement of funds from CEX to personal wallets.
Crypto wallets, including Ledger, have low exposure to illicit activities: let’s see why
Many believe that personal wallets pose a significant risk of illicit activity, likely due to the fact that, at a technical level, their ability to transact cannot be hindered by third parties.
Some lawmakers and regulators have cited this risk as a reason for imposing stricter compliance rules on transactions involving personal wallets. However, personal wallet activity can be monitored on the blockchain, and data show that these actually have low exposure to illicit activity.
In fact, since 2020, less than 1% of all funds transferred into personal wallets have come from addresses associated with illicit activity. Moreover, most of the volume of transactions involving personal wallets involves the movement of funds to or out of a centralized exchange.
But, how can personal wallets better serve their growing user base of institutional investors and enable them to pursue their desired investment strategies without compromising their funds?
Certainly, by enabling support for multiple blockchains so that investors can access as many assets as possible from a wallet product. Next: transaction previews that allow users to see exactly what will happen if they execute a specific transaction, sign a contract or connect to a protocol.
On top of that: better processes and private key management tools, built-in compliance tools, and faster transaction speeds.