Chainlink launches CustodySync so institutional capital can lend in DeFi without moving assets out of the custodian

CustodySync allows qualified custodians to give their institutional clients access to DeFi lending markets while the assets remain in custody.

It keeps the custodian’s records and the onchain market in sync across deposits, borrowing, repayments and liquidations. To do so, it uses Proof of Reserve, a receipt token with restricted transfers, its data feeds and automation.

The launch partner is Anchorage Digital Bank, the first qualified custodian to use it. Chainlink compares some $700 billion in digital assets under custody with around $250 trillion in traditional assets, and puts DeFi lending at more than $80 billion in deposits.

• Chainlink CustodySync is a new solution that enables qualified custodians to give their institutional clients access to DeFi lending while keeping assets securely in custody.
• Anchorage Digital, home to the first federally chartered digital asset bank in the US, is the official launch partner.
• CustodySync turns passive capital into productive capital by allowing institutions to borrow using as collateral custodied assets that would otherwise sit idle.

Institutional adoption of digital assets is accelerating as qualified custodians simplify the management of sensitive private keys, removing the associated complexity and risk. While this has driven institutional adoption, a crucial trade-off is that this custodied capital has remained largely out of reach of DeFi lending markets. At approximately $700 billion , the total value of digital assets under custody represents less than 0.5% of the $250 trillion in traditional assets under custody; the opportunity to connect this institutional capital with onchain finance remains enormous. 

However, custody systems and onchain lending protocols were simply not designed to be interoperable with each other. For institutions, this creates a significant barrier; accessing DeFi lending markets generally requires moving assets out of their existing custody systems, which conflicts with their internal policies and security requirements, including restrictions on exposing assets directly to smart contract risk.

Chainlink CustodySync is a new solution that keeps a qualified custodian’s existing systems and DeFi lending markets in sync throughout the entire lifecycle of a loan, from deposit and borrowing to repayment and liquidation. CustodySync allows the qualified custodian to retain control of its clients’ digital assets, as both the custodian and the lending market operate on the same verified data provided by Chainlink. 

CustodySync officially launches with Anchorage Digital Bank, NA as a strategic partner. Anchorage Digital’s custody infrastructure and its Atlas Collateral Management product work in conjunction with lending protocols, giving borrowers the tri-party institutional framework they are accustomed to, while facilitating essential functions on behalf of the protocols as their designated collateral agent.

Together, Anchorage Digital and Chainlink ensure that institutions no longer have to choose between keeping assets in qualified custody and accessing global DeFi markets.

The gap between regulated custody and DeFi liquidity

DeFi lending markets hold more than $80 billion in deposits and more than $30 billion in active loans, giving market participants global access to deep and consistent liquidity. However, for many institutions, holding assets with a qualified custodian is a strict requirement set by regulation, investment mandates and internal risk management policies.

Historically, connecting assets under custody with DeFi liquidity has posed various practical hurdles. For example, if a custodian tracks the collateral status and loan-to-value (LTV) ratio of positions in its own collateral management system, independently of how a DeFi lending protocol tracks the same positions on the blockchain, the two systems can fall out of sync. When the prices or balances used by the two systems do not match, whether due to differences in data inputs or latency between them, each party may reach a different conclusion about when a margin call or liquidation should occur. This can lead to erroneous liquidations of a position the custodian considers healthy, or delay liquidation until the collateral no longer covers the loan, leaving the client or the lender to bear the loss.