.svg)
In our everyday financial lives, we deposit cash in banks to keep it safe. These banks operate within a centralized system, consisting of physical branches, staff, and machines that allow us to store and access our funds whenever the need arises. They’re not just places to stash our funds; they play two crucial roles:
This system is convenient and secure, but it still has some drawbacks. The main hiccup? The need for a middleman like a bank to facilitate transactions.The first cryptocurrency, Bitcoin, was created for this very reason — to allow individuals to conduct peer-to-peer transactions without relying on a “middleman”. Instead of depositing funds in a bank, we can store cryptocurrencies in digital wallets secured by blockchain technology. Whenever we wish to transfer ownership of these digital assets, it’s as simple as moving them from one wallet to another. Think of a crypto wallet as your personal bank account, with one difference – , you get to decide how much control you have over your assets.
In the exciting world of cryptocurrencies one critical aspect stands out as essential – crypto custody. This term may sound complex, but it’s all about keeping your digital wealth safe and secure. If you want to participate safely in the crypto ecosystem, you must first understand how this custody works.
Custody, in the crypto realm, is like storing assets in a vault and locking it with a key. You have the choice to keep the key yourself or entrust it to someone you trust, who can open the vault when you need to add or transfer funds. Without the key, no one can access the crypto assets inside.
Imagine you have some digital coins, like Bitcoin or Ethereum, stored in your smartphone. Crypto custody solution is like adding an extra layer of protection to make sure nobody can sneak in and take your coins.
This protection can come in two ways: self-custody and third-party custody. The crucial distinction lies in who controls the wallet. In a way, self-custody means you are your own bank, while third-party custody resembles a bank account but with cryptocurrencies instead of fiat money.
Custody solutions also vary in terms of security and convenience. Each comes with its own unique set of features, benefits, and risks. Choosing the type of custody that is right for you is crucial for the safety of your crypto assets.
Self-custody puts you in full control of your assets, but it also means taking full responsibility for securing your crypto accounts. Since you are the sole owner and manager of your account, you don’t need to reveal your identity to the custody provider (the application or platform your account is in). You can set up as many accounts as you want while remaining anonymous.
Here’s how it works: You have a digital wallet, and inside that, you hold the keys that let you access and manage your coins. Nobody else has those keys but you.
This self-custody approach offers a high level of security, and while it seems like an ideal solution, it also comes with disadvantages and risks. For instance, if you forget your seedphrase (a backup to recover a lost wallet), you cannot ask the custody provider to reset it. Or, if you accidentally send crypto to a wrong address, you cannot ask the custody provider to get it back. So, just something to take note, self-custody can be complicated for new crypto users.
On the other hand, third-party custody uses an approach where users trust a third party to keep their crypto assets safe. You still set a password to access your wallet, just like in self-custody. However, it is the third-party custodian who manages your private key for you. Without this private key, you will never have complete control over your account.
While this may sound tricky, it can be advantageous if you ever forget your password. All you have to do is ask your third-party custodian to reset it for you. This also entails revealing your full name and other personal information during registration, making it easier to track users involved in illegal crypto activities.
Third-party custody is more centralized and quite similar to the way a traditional bank operates. Often, the user interface and integrations with other apps are easier to use compared to self-custody solutions. Additionally, the custody provider is typically insured, registered, and government-regulated to protect customer funds misuse.
Breaking It Down:
Informed choice? We love it! So, here are some features to check out when finding the right and trustworthy crypto custody solution for you:
Make sure that the custody provider you choose offers secure integrations with various exchanges, payment gateways, and other service providers.
Choose a custody solution that’s easy to navigate and free of software glitches to prevent transaction failures.
A trustworthy custody provider should offer accurate, up-to-date tracking and analysis of your crypto portfolio. Your transaction records and current balance should be available whenever you want to view them.
To ensure the safety of your crypto assets, find a custody provider that offers the following: secure encryption, 2-Factor Authentication (2FA), and backup and recovery options. Take note that both hot and cold wallets encrypt user data and private keys to keep them safe. Meanwhile, 2FA adds another layer of security whenever a user tries to access their account. Of course, the crypto wallet must also offer backup options in case the user forgets the password to the account.
Both crypto custody solutions have their pros and cons. Self-custody offers you full control over your assets but demands full responsibility to keep them safe. In contrast, third-party custody simplifies management but sacrifices some control.
In the upcoming modules, you’ll delve deeper into these custody categories to help you determine the best fit for your crypto journey.
.png)
.png)
.png)
.svg)
.svg)
.svg)
.svg)
