Introducing Chainlink CustodySync: Connecting Institutional Capital to DeFi Lending Markets

Institutional adoption of digital assets is accelerating as qualified custodians abstract away the complexity and risk of managing sensitive private keys. While this has boosted institutional adoption, a critical trade-off is that this custodied capital has remained largely out of reach of DeFi lending markets. At roughly $700 billion, the total value of digital assets under custody represents less than 0.5% of all $250 trillion in traditional assets under custody; the opportunity to connect this institutional capital to onchain finance remains vast. 

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 typically requires moving assets out of their existing custody arrangements, which conflicts with their internal policies and security requirements, including limits 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 across the full lifecycle of a loan, from deposit and borrowing through repayment and liquidation. CustodySync enables the qualified custodian to retain control of its clients’ digital assets, with both the custodian and the lending market acting on the same verified data delivered by Chainlink. 

CustodySync goes live with Anchorage Digital Bank, N.A. as the official launch partner. Anchorage Digital's custodial infrastructure and its Atlas Collateral Management product work in tandem with lending protocols, providing borrowers the institutional tri-party framework they are accustomed to while facilitating core functions on behalf of protocols as their appointed collateral agent.

Together, Anchorage Digital and Chainlink are ensuring institutions no longer have to choose between holding assets in qualified custody and accessing global DeFi markets.

The Gap Between Regulated Custody and DeFi Liquidity

DeFi lending markets consist of more than $80 billion in deposits and over $30 billion in active loans, giving market participants global access to deep, always-on liquidity. For many institutions, however, keeping assets with a qualified custodian is a strict requirement set by regulation, investment mandates, and internal risk policies.

Historically, connecting custodied assets to DeFi liquidity has raised a number of practical obstacles. For instance, if a custodian tracks the collateral status and loan-to-value (LTV) of positions within its own collateral management system independently of how a DeFi lending protocol tracks the same positions onchain, the two systems can become out of sync. When prices or balances used by the two systems are misaligned, whether due to differing data inputs or latency between systems, each side may reach a different conclusion about when a margin call or liquidation is due. This can trigger false liquidations of a position the custodian considers healthy, or delay liquidation until the collateral no longer covers the loan, leaving either the client or the lender to absorb the loss. 

CustodySync addresses these challenges by enabling custodians to offer users direct access to DeFi liquidity without giving up control of their assets, all backed by Chainlink’s industry-standard data infrastructure.

How Chainlink CustodySync Works

CustodySync coordinates two independent systems: a qualified custodian's collateral management system, which remains the source of truth for collateral balances, and an onchain lending market, which provides liquidity. CustodySync keeps the two systems in sync at every stage.

• Collateral stays with the custodian. When an institution deposits collateral with their qualified custodian, the custody balance is published onchain via Chainlink Proof of Reserve, providing a verifiable onchain record of collateral anyone can verify.
• Collateral is represented onchain. A transfer-restricted receipt token representing the assets held in custody is then posted to the onchain lending market. Its supply reflects the assets held in custody and carries no claim on the underlying assets outside the lending integration.
• Clients borrow directly. Assets move from the lending market to the borrower in a single transaction. Every borrow, repayment, and interest accrual is recorded in the custodian's records automatically.
• Both systems priced from the same source. The lending market reads Chainlink Data Feeds onchain, while Chainlink Data Streams deliver identical values directly to the custodian’s offchain systems, so both sides calculate LTV from the same data.
• The collateral agent facilitates liquidations. If a loan breaches the defined liquidation threshold, the appointed collateral agent sells through its own process. CustodySync records the committed sale proceeds onchain ensuring the position remains stable while the sale settles, with final settlement executing via a single atomic transaction.

CustodySync combines multiple components of the broader Chainlink platform into a single solution:

• The Chainlink Runtime Environment (CRE) automates the synchronization between systems. It monitors the custodian's collateral management system, executes the corresponding onchain actions according to participant authorizations, and writes loan activity back to the custodian.
• Chainlink Data Feeds deliver the price data the lending market uses to value the position onchain.
• Chainlink Data Streams deliver the same price data to the custodian directly, enabling both systems to calculate LTV from a common source.
• Chainlink Proof of Reserve publishes the custody balances onchain for any party to verify onchain.

CustodySync includes a standardized set of smart contracts, designed by Chainlink and deployed by the lending market or a risk curator, through which collateral and loan actions are executed.

Key Benefits for Custodians and Lending Markets

For qualified custodians:

• Faster time to market: Adopt a ready-made standard instead of building and maintaining a custom integration with each lending market.
• Lower operational overhead: Chainlink operates the workflows that keep collateral, pricing, and loan activity in sync with the custodian’s existing systems.
• Easier lending market adoption: Chainlink actively secures tens of billions of dollars across 70% of all DeFi markets, providing the pricing and collateral data that leading lending protocols already rely on, so a Chainlink-based integration builds on infrastructure these markets already trust.
• Control stays with the custodian: Client assets never leave custody, and the custodian manages liquidations through its own process.

For lending markets and risk curators:

• Independent, verifiable data: Chainlink acts as a neutral third party, publishing custody balances onchain via Proof of Reserve and delivering pricing through the same oracle infrastructure DeFi markets rely on today.
• A consistent risk framework: Custodied collateral is valued using the same Chainlink Data Feeds as existing markets.
• New institutional demand: Access borrowing demand from institutional capital that was previously unable to reach DeFi.

Anchorage Digital Bank: The Official Launch Partner for CustodySync

Anchorage Digital Bank is the first qualified custodian to build with CustodySync, using it to connect its institutional client base to DeFi lending markets. Its adoption marks a significant step toward bringing regulated custody and onchain liquidity together.

“Institutions should not have to choose between qualified custody and onchain liquidity. Through Atlas Collateral Management and our collaboration with Chainlink, Anchorage Digital clients keep their assets in regulated custody while we monitor loan health and manage margin and liquidation across the full lifecycle of the loan.” — Nathan McCauley, CEO and Co-Founder, Anchorage Digital

Expanding Institutional Access to Onchain Liquidity With CustodySync

CustodySync unlocks a new role for any supported digital asset in qualified custody: collateral for accessing global, always-on liquidity in DeFi. Institutions can borrow against their holdings while retaining the custody protections they require, and DeFi lending markets can serve the growing institutional demand for onchain liquidity.

CustodySync adds a new avenue for institutional capital to reach onchain liquidity, within the existing custody framework institutions already rely on.

Ultimately, CustodySync advances a unified global financial system where institutional collateral can be put to work across any system where opportunity exists. By connecting institutional assets to onchain liquidity, CustodySync expands access to onchain financing and unlocks the productive potential of the $700 billion digital asset custody market to expand to the scale of the $200-250 trillion traditional custody market.

Custodians, lending markets, and risk curators interested in CustodySync can talk to a Chainlink Labs expert to get started.

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Disclaimer: This post is for informational purposes only and contains statements about the future, including anticipated product features, development, and timelines for the rollout of these features. These statements are only predictions and reflect current beliefs and expectations with respect to future events; they are based on assumptions and are subject to risk, uncertainties, and changes at any time. There can be no assurance that actual results will not differ materially from those expressed in these statements, although we believe them to be based on reasonable assumptions. All statements are valid only as of the date first posted. These statements may not reflect future developments due to user feedback or later events, and we may not update this post in response. Chainlink Labs does not hold, custody, or transfer any assets, and does not act as a custodian, lender, borrower, or counterparty to any loan. Features may vary by custodian, and not all features may be available at Anchorage Digital Bank, N.A. Please review the Chainlink Terms of Service, which provides important information and disclosures.