Mastering Cryptocurrency Management: Top Cryptocurrency Security Measures for Safe Storage
Intro
Bitcoin was designed as an electronic, peer-to-peer payment system, allowing two willing parties to transact directly without middlemen. This was an attractive proposition for early adopters following the 2008 financial crisis when banking malpractice led to a wide loss of trust in the traditional financial system. As such, Bitcoin offered an alternative with some serious potential.
Primarily, Bitcoin was created to take intermediaries out of finance; returning control to the people. This was the premise the whole crypto ecosystem was built on. Many chains, protocols, and crypto solutions embraced the ethos of blockchain, striving for a more decentralized transfer of value. But, that’s not strictly true for every crypto platform and service in existence, and that also extends as far as storage solutions.
To reiterate: not all solutions for storing crypto offer self-custody. While some wallet providers put you in control, others reserve the right to do whatever they like with your crypto. But before we get there, let’s explore the basics. In fact, what is self-custody in crypto in the first place?
What Is Self-Custody in Crypto?
Self-custody in crypto is all about ownership. Unlike centralized financial institutions such as banks, self-custodial solutions allow you true ownership of your assets.
You see, when someone says they store crypto in their crypto wallet, that isn’t strictly accurate.
Your crypto is stored on the blockchain network, by every single node. Each node in the network stores a copy of the entire blockchain’s history—every single transaction ever made. So, instead of storing cryptocurrency, your crypto wallet stores the secret information that allows you to manage a specific account called a private key.
Every address on a blockchain network is tied to a key pair. There’s a public key, which your blockchain address is derived from, that acts as a unique identifier for that account. Then there’s a private key, which allows anyone the power to manage the assets at the associated blockchain address.
That private key is what your crypto wallet must store, and it must do so securely since anybody with the private key of an address can access its funds. But what do private keys have to do with custody of your assets exactly?
Who Owns Your Private Keys?
When you hear about custody in crypto, it’s essentially about who controls the private keys of a crypto wallet. To explain, there are two approaches a wallet provider can take to custody: custodial or non-custodial solutions. A custodial crypto wallet is one whose private keys are held by a third party; typically a centralized exchange. Conversely, a non-custodial wallet requires its owner to manage their own private keys.
The difference may seem minimal, but these two wallet types have vastly different approaches to security.
Using a custodial wallet is much like securing your funds in the bank. With this method, you are protected from thieves. However, you depend on the bank to access your funds, meaning they have access to your accounts. If the bank fails, or mismanages your funds, there’s nothing you can do about it. This is exactly how custodial wallets work: the provider reserves the right to access your funds when they like. That’s not exactly ideal!
On the other hand, using a non-custodial wallet is much like storing cash physically; such as in a safe or under your floorboards. With this method, only you control how and when you spend your funds. However, you’re also responsible for storing it in a safe place. If anyone were to get a hold of your cash, they could spend it. Similarly, anyone with access to your private keys can manage the assets at that address. This is why it’s often said that “with self-custody comes responsibility”.
The Benefits of Self-Custody
So now you know what self-custody in crypto means, but let’s dive a little deeper. There are a range of benefits of managing your assets yourself—and not all of them are as obvious as the first.
Ownership
If there’s one famous phrase in crypto it’s Not your keys, not your coins”. The truth is that without a non-custodial wallet, you don’t truly own your assets.
At best this can mean inconveniences such as spending limits and transaction fees, but the consequences can get much more severe than that. For example, if a centralized wallet provider goes bankrupt or otherwise fails, you could lose access to your funds—through no fault of your own!
Then, consider counterparty risk stemming from a centralized entity that uses bank reserves. Even in crypto, some projects rely on bank reserves: fiat-backed stablecoins are a good example. To put it simply, using a non-custodial wallet for a coin doesn’t help if the centralized issuer relies on banks and traditional financial institutions.
More Wallet Options
When you use a custodial wallet, you will likely be limited to a wallet interface on a browser or mobile app. Conversely, when you self-custody your crypto you have countless wallet options from which to choose.
To clarify, almost all non-custodial wallets today benefit from BIP-32 and BIP-39 compatibility. Thanks to this standardization, a single 12-24-word seed phrase can recover a near-infinite number of blockchain addresses. What’s more, you can actually switch between non-custodial wallet providers by importing your wallet using those 12-24 words. Unlike with custodial wallets, you’re free to move from provider to provider as you’d like. Even if the wallet provider you use goes out of business, you can easily import your accounts into another non-custodial wallet’s interface. That’s true ownership!
Enhanced Privacy
Privacy is a major topic of concern within crypto, given the nature of blockchains as public ledgers. Indeed, many crypto users prefer to keep their public wallet addresses completely anonymous to help maintain their privacy. The thing is, this is only fully possible with a self-custody wallet.
Custodial wallets require you to undergo a full Know Your Consumer (KYC) process, which involves volunteering personal information like your name and address, and even a form of photo identification. While this information might not necessarily be tied to any public wallet address, you are putting your faith in the wallet provider to keep it safe from any potential data leaks or attackers.
