Self-custody is the idea that an individual should be able to safeguard the private key to their crypto wallet without relying on a custodian to do it for them.
This allows individuals to protect and control their assets instead of needing the assistance of a third party intermediary.
While self-custody does grant the user complete autonomy over their funds, the flip side of this is that it also forces them to take complete responsibility for the security of their holdings.
In fact, over the past decade, an estimated 4 million bitcoins have been unnecessarily lost due to user error.
Why would anybody want to deal with this instead of just using a custodial wallet?
Read on to learn more about the promise of self-custody.
What is a self custody wallet?
When you self-custody your crypto, this means that you store your crypto at a digital address or a “wallet” that is totally controlled by you. These “wallets” may be referred to self custody wallets, non-custodial wallets, or self hosted wallets.
A self-custody wallet is a cryptocurrency wallet where only the holder possesses and controls the private key to that wallet.
Private keys are a vital part of the cryptocurrency ecosystem, as they are used to sign and verify transactions on the blockchain.
When individuals have control over their private keys, they can access and manage their cryptocurrency holdings without relying on a third party, such as an exchange or online wallet service.
There are several types of self-custody wallets, including:
- Hardware wallets. Physical devices store private keys offline, making them more secure against hacking attempts.
- Software wallets. Digital wallets can be installed on a computer or mobile device.
- Paper wallets. Physical documents that contain private keys can be stored in a safe place.
Self-custody wallets offer many benefits, including increased security, greater control over one’s assets, and the ability to manage cryptocurrency holdings without relying on a third party.
However, it is crucial for individuals to carefully manage their private keys and to follow best practices for securing their self-custody wallet.
Benefits of self-custody
Self-custody offers some distinct advantages, and we’ve already touched briefly on some of them, such as security and control.
- Censorship resistant. Holding crypto in a non-custodial wallet means that those assets cannot be frozen or confiscated by a third party. In countries with capital controls or targeted discrimination, self-custody becomes a technology of empowerment.
- Increased security. Non-custodial wallets offer increased security compared to custodial wallets, as the individual controls their private keys. Their keys are not stored on a central server that could be hacked or subject to other vulnerabilities like counterparty risk.
- Expanded access. Self-custody can be particularly liberating for unbanked individuals, who may not have access to traditional financial services such as bank accounts and payment cards. With self-custody, these individuals can still use cryptocurrency to store, send, and receive funds, even if they don’t have access to traditional financial services.
- Greater control. With self-custody, the individual has complete control over their own funds and can manage them as they see fit. This is in contrast to custodial wallets, where the funds are managed by a third party, and the individual may not have as much control over their use.
- Decentralization. Non-custodial wallets are often associated with decentralization, allowing individuals to hold and manage their own assets without relying on a central authority. This aligns with the decentralized nature of many cryptocurrencies and can help to promote a more equitable and transparent financial system.
- Privacy. Non-custodial wallets can offer greater privacy, as they often do not require individuals to provide personal information. This can be especially important for those who are concerned about the potential for their data to be misused.
Self-custody offers numerous benefits for those looking to securely and privately manage their cryptocurrency holdings.
Drawbacks of self-custody
There are a few potential drawbacks to self-custody that you’ll need to carefully consider to ensure you’re comfortable with the level of responsibility and complexity involved.
- Responsibility. With self-custody, you’ll be responsible for safeguarding your assets and personal information. This can be challenging, but we’ve put together some great resources for managing your data.
- Complexity. Self-custody can involve a greater degree of complexity compared to using a custodial service. For example, an individual may need to set up and manage their own hardware or software wallet, which can be time-consuming and require specific technical knowledge.
- Limited functionality. Self-custody wallets may offer only some of the features and functionality of custodial wallets, such as quickly buying and selling cryptocurrency or accessing advanced trading features.
Your keys, your crypto
While self-custody can involve a greater degree of responsibility and complexity, it is a powerful way for you to take control of your own assets and to participate in cryptocurrency and decentralized finance.
We believe in self-custody; so strongly, in fact, that we’ve created the only crypto app with a custodial and non-custodial wallet in the same place. This means you can purchase crypto using fiat currency, then self-custody that crypto in the same place, without having to switch between apps.
Sign up for free today, buy your first crypto and store it in the worlds most popular non-custodial wallet.
If you enjoyed this article and want to learn more about self-custody and DeFi, check out these articles:
- “Not your keys, not your crypto” explained
- How to self-custody your crypto using Blockchain.com
- Seed Phrase, Explained
Are self-custodial wallets secure?
Yes, one of the biggest benefits of non-custodial wallets is their security. However, they are susceptible to human errors. If you self custody your crypto, you are fully responsible for retaining your private key and seed phrase.
For example, here at Blockchain.com, 95% of all funds are stored in offline cold wallets which are distributed across the world in facilities that specialize in physically securing valuable items.
While we’re proud of the security we provide, the fact is that even if a non-custodial wallet provider was compromised, as long as you had your private key and seed phrase, your assets would be safe.
Will one wallet work for all coins?
Not all wallets work for all assets. The Blockchain.com Wallet handles assets across multiple blockchains, so you will see private key wallets for BTC, ETH, and dozens of other cryptocurrencies.
This information is provided for informational purposes only and is not intended to substitute for obtaining accounting, tax or financial advice from a professional advisor.
The purchase of crypto entails risk. The value of crypto can fluctuate and capital involved in a crypto transaction is subject to market volatility and loss.
Digital currencies are not bank deposits, are not legal tender, and are not backed by the government. Blockchain.com’s products and services are not subject to any governmental or government-backed deposit protection schemes.
Legislative and regulatory changes or actions in any jurisdiction in which Blockchain.com’s customers are located may adversely affect the use, transfer, exchange, and value of digital currencies.
Self-Custody, Explained was originally published in @blockchain on Medium, where people are continuing the conversation by highlighting and responding to this story.