Self-custody in crypto is the process of storing your own cryptocurrency using a digital or physical wallet, thereby removing it completely from any exchange or custodial partner. A self-custody wallet, also known as a non-custodial wallet, ensures that you and only you have access to your cryptocurrency.
Self-custody also means you are responsible for your private keys, which means if you lose access to your self-custody wallet for any reason you will probably lose access to your crypto.
In short, self-custody is an excellent practice but care must be taken to ensure security and safety at all times. Here are some tips on managing your own crypto.
What are self-custody wallets?
Put simply, self-custody wallets hold your private keys which, in turn, allow you to access your crypto on the blockchain. Your wallet doesn’t hold cryptocurrency. Instead, it protects your private keys and keeps all records of their existence off of the internet.
Custodial wallets, on the other hand, let you access your crypto with a password or other security measure but the organization that holds the custodial wallet also holds your keys.
Self-custody also involves holding your own public key which is like an address for your wallet. This allows people to send crypto to your wallet but, without the private keys, they cannot withdraw or transact using your wallet.
What do private keys have to do with custody?
As we noted before, your private key is a long string of letters and numbers used to gain access to funds associated with a crypto wallet. It acts like a password and can be used to generate a digital signature to prove your ownership of funds on the blockchain.
The digital signature effectively broadcasts your ownership of cryptoassets without revealing your private keys.
If you are interested in learning more about private keys, cryptography and the technology that powers crypto, you can check out our Learn Center article “How do cryptocurrencies use cryptography?” first.
Private keys shouldn’t be confused with public keys which are also generated by your wallet and used to receive cryptocurrency. You can think of your public keys like a bank account number that can be shared with anyone. Private keys, on the other hand, should never be shared with anyone. They are the security equivalent of a PIN number.
Self-custody
Cryptocurrency and blockchain technology allow users an unprecedented level of financial independence.
When a custodian, like a crypto exchange, holds your private keys they are able to put limits on your transactions or even charge fees for using your crypto. They may also be subject to regulatory changes or suffer security breaches, potentially leading to a loss of funds. Ultimately, these issues led to the creation of the popular expression, “not your keys, not your coins,” which continues to be a mantra of the self-custody movement.
When you take proper custody of your own private keys, you know that your assets are truly safe because only you have access to your crypto.
Types of self-custody wallets
Mobile/desktop wallet
Mobile and desktop wallets exist primarily on hardware devices like your phones and laptops. They allow for access to your funds on-the-go and usually include some kind of backup system that ensures that if your device is lost you won’t lose your private keys. Be sure to secure your wallet with a complex password or biometric security – or both.
You should also avoid keeping large amounts of crypto on your devices because if they are stolen, damaged or corrupted you run the risk of losing your private keys!
Smart contract wallet
A smart contract wallet is used with the Ethereum blockchain and allows you to access items like NFTs and other smart contracts. Most of these apps run as browser extensions and allow you to log into various web-based exchanges. The private keys for this type of wallet are stored on the host computer and just like your mobile or desktop wallet you should take care to maintain absolute security when it comes to password protecting and setting transaction alerts on this kind of wallet.
Hardware wallet
A hardware wallet is a small piece of electronic equipment that can hold your private keys. This is one of the safest ways to store your keys and many hardware wallets allow you to connect to a web app that lets you send and receive crypto. Hardware wallet setups usually require you to create a 24-word recovery phrase that will allow you to access your crypto in the event you lose your physical crypto wallet. Keep this safe and separate from your hardware wallet.
Leading providers of these solutions include:
It’s important to note, you should only ever buy these devices directly from the official manufacturer. Buying second hand or through a different provider runs the risk of the device being tampered with which can result in the theft of funds.
Paper wallet
Paper wallets are basically sheets of paper containing your public and private keys. They are easy to create (some exchanges allow you to create them right from your browser) and almost impossible to hack. That said, if you lose that piece of paper, your keys and crypto are lost forever. Paper wallets have fallen out of favor but they are probably the most secure method for storing crypto over a long period of time.
Are self-custody wallets secure?
Self-custody wallets are as secure as you make them.
Self-custody wallets allow you – or anyone else – to access your crypto. If you don’t secure them physically and digitally, they will be extremely insecure.
Keep any crypto that you don’t use or transact with on a monthly basis in a secure hardware wallet and store it in a fireproof and waterproof safe.
Store your key phrase elsewhere, also in a fireproof and waterproof container. If and when you need to access these items in an emergency you’ll be glad that they remained safe even in the case of an accident or natural disaster.
In addition, you may wish to create multiple hand-written copies of the same phrases and distribute them across different locations to spread your risk and avoid having all your sensitive crypto information in one fixed place.
Can a self-custody wallet maker access my crypto?
Self-custody wallet makers actively probe their product lines for security problems and bugs.
In general, your self-custody wallet maker should have no ability to gain access to your crypto at any time once a device has been sold to you.
To ensure your device runs as intended, it’s recommended you always update your hardware and software wallets regularly and ideally encrypt and back up your wallet files regularly.
Should I self-custody?
At Kraken we believe that self-custody is vital for any crypto user. We want you to be responsible for your own crypto for many reasons, including the belief that crypto must remain decentralized and every crypto user should know and understand the importance of public and private keys.
Giving power to a custodial wallet to control your assets may seem like an easy way to manage your crypto but it’s not absolutely secure nor is it recommended.
What can I share and what shouldn’t I share?
The only thing you should ever share is your public wallet address.
You should never share:
Your private key.
Your wallet passwords.
Your wallet 2-factor authentication codes.
Your wallet back-ups.
Your seed phrase.
Never give this information to anyone, online or off. No one from any legitimate exchange will ever ask you for any of this information at any time.
Copying down this information should only be done by hand, making sure to do it in a room free of people and devices with cameras. You can copy information down on paper and laminate it, or there are physical metal solutions where you can etch details into plates for better longevity.
Providers of this solution include,
Keeping your crypto secure is work. Your mission is to keep your private keys and passwords safe at all times and the more you research crypto the easier this will become. Until you become a crypto pro, however, remember: not your keys, not your coins. Self-custody might seem hard but it’s far better than any other alternative.
Create a Kraken account to benefit from our industry-leading security while you set up your self-custody wallet and take control of your own financial freedom.
These materials are for general information purposes only and are not investment advice or a recommendation or solicitation to buy, sell or hold any cryptoasset or to engage in any specific trading strategy. Some crypto products and markets are unregulated, and you may not be protected by government compensation and/or regulatory protection schemes. The unpredictable nature of the cryptoasset markets can lead to loss of funds. Tax may be payable on any return and/or on any increase in the value of your cryptoassets and you should seek independent advice on your taxation position.
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Source: https://blog.kraken.com/post/16420/self-custody-best-practices/
