8
min read
August 18, 2021

What is Self-Custody and Why Does it Matter for Your Crypto?

Learn more about what self custody wallets are and why they are important.

Earth DAO
Earth DAO

What is self-custody?

Self-custody can be explained as a method of storing your digital assets in a secure location that only you can access. This implies you’ve decided to handle your private key yourself rather than entrusting it to a third party. It isn’t issued by a bank or any other institution, and it can’t be used to verify transactions.

Because your private key is not stored anywhere else, it is your duty to keep it safe. Instead of depending on a financial middleman, you have 100% control and access to your financial assets any time, any day. You may take part in DeFi because of this flexibility.

Cryptocurrencies transactions occur between a sending address and a destination address, similar to a financial institution account details. And the public key is technically the name for this address. Anyone can transfer Bitcoin or Litecoin to your public key, simply by sending it to your wallet. Because you may transfer it to anybody without jeopardizing your crypto, it’s termed public.

However, there is another unique key associated with your public key. This is known as the private key and it’s designed to be the most important key. Anyone with the private key has full control of the funds on the public key to which it is connected. A private key in simple terms is similar to a password that serves as a means to identify you as the rightful owner.

“Not your keys, not your coins.”

In the world of cryptocurrencies, the phrase “not your keys, not your coins” alludes to the requirement of owning the private keys to your crypto assets.
The philosophical justifications for saving or putting your crypto funds in a wallet that you have complete control over are straightforward. The cryptocurrency was established in opposition to a centralized banking and money system that takes power away from individuals.

Therefore, entrusting your assets to a third party is like going against the initial building purpose of cryptocurrencies. Private keys are owned by the person who decides how the crypto assets connected with them are spent; if you don’t have them, you’re committing your cryptocurrency to a third party.
Apart from the fact that you don’t have total control over how your assets are used, there are a number of major practical disadvantages to handing your crypto assets to third-party custodians like Robinhood, Coinbase, and Cashapp/Square, among others. some of these drawbacks are discussed below:

What are the risks of using third-party custodians/exchanges?

Security Risks

The danger of losing your crypto assets as a consequence of a hack is by far the most obvious disadvantage of storing your assets on an exchange. There have been around 45 exchange breaches so far as of the day of this write-up, resulting in a total loss of nearly $1.86 billion.

The 2014 hack of Mt.Gox ( a bitcoin exchange platform), which resulted in the loss of nothing less than $660 million in customer monetary assets. And the $40 million loss caused by a cyberattack on Binance, the world’s largest crypto exchange, is the two most well-known hacking attacks.

If for any reason, you opt to store your crypto funds with any third party, be sure to use all of the security measures available, activate two-factor authentication wherever possible, and stay watchful.

“Can I trust someone else with my keys?”

When you entrust your keys with a third party exchange custody. What you have is a claim, a guarantee that if you ask, they will let you withdraw your crypto funds. It’s just like a pre-paid bus ticket: if the bus stops moving, you can’t move anymore.

Your account might potentially be hacked, and your cash drained. Repeat spam attacks are perfect for an exchange with a big customer base. Although two-factor authentication and withdrawal restrictions are beneficial, they may not be sufficient.

How to Self Custody Your Crypto?

Users have control over their cash using non-custodial wallets. The basic idea is that users own the private key associated with their account, despite the fact that non-custodial wallets exist in different forms. The Non-custodial wallet provider should not have access to or control over such money. The wallets are just interfaces that let users interact with monetary assets held on the Blockchain. Here are some of the Non-custodial wallets types you can use to self custody your crypto:

Mobile Wallet

This wallets type is apps that run on your IOS or Android device and are useful since they are constantly with you. Depending on the kind of app, the private key is mostly produced and kept on your smartphone, with recovery and backup options. Metamask is one of the most popularly used mobile wallets. You may store Crypto tokens and operate Ethereum dapps (such as Uniswap or Compound) straight from your mobile browser using Metamask.

Desktop Wallet

Desktop wallets are software applications that you may install on your desktop to act as a secure depository and hot wallet for your cryptocurrencies. As far as your computer is clear of security flaws and viruses, the private key is protected. Hackers are interested in these sorts of wallets. Earth Wallet is an excellent example of Desktop wallets, and it is the world’s first self-custody wallet.

Hardware Wallet

This form of wallet is an offline device that stores private keys in an encrypted format. This wallet can verify transactions, however, it never divulges any private key information in plain text. The device’s operation is limited, limiting its security risks. Hardware wallets are hard to hack provided that all recovery codes are likewise stored offline.

In the world of cryptocurrency, Ledger is the most well-known hardware wallet. It can use LedgerLive to interface with various blockchains and authenticate transactions using a variety of ecosystem wallets such as Metamask. In short, it’s convenient and has the highest level of security.

In summary

You have exclusive control over your private keys which manage your cryptocurrencies and confirm the money is yours when you use a non-custodial wallet. By using a custodial wallet, you simply hand up the control of your private keys to someone else. Nowadays, the most used self-custody wallet is Earth Wallet which is an excellent example of desktop wallets.

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