Self-custody means holding your own crypto private keys instead of relying on an exchange or other third party.
What Is Self-Custody?
Self-custody means holding your own crypto
private keys instead of relying on an exchange or other third party.
Private keys allow users to access and move their digital assets. Most people self-custody through a crypto
wallet, which may be a software wallet, a hardware wallet or another type of wallet that lets them approve transactions directly. Unlike a custodial account on an exchange, the wallet provider does not hold the user’s assets or control whether they can send them.
Some wallets use a
seed phrase, which is a group of words that acts like a backup for the wallet. If a user loses the seed phrase, they may lose access to their funds. Other wallets use alternative backup systems that do not require users to write down a seed phrase.
Why Do People Use Self-Custody?
People use self-custody because it gives them direct control over their crypto assets.
The main alternative — holding crypto on a
centralized platform — poses several risks, including
security vulnerabilities, downtime, privacy issues and control. Below is a breakdown of why these issues are concerning.
Security vulnerabilities: The potential for hacking and cyberattacks against centralized platforms remains a threat. Even some of the largest centralized exchanges have experienced security incidents.
Downtime: When exchanges face downtime, users may be unable to access that platform, trade or withdraw assets. This limits their control over assets held on the exchange.
Privacy: Many centralized exchanges require users to complete
know-your-customer checks that go beyond sharing a name and email address. These checks may require a driver’s license, passport, Social Security number, home address or other sensitive information. If that information is exposed or misused, it can create serious privacy and security risks.
The failures of 2022 answered this question. Celsius suspended withdrawals, leaving hundreds of thousands of users locked out of their funds. FTX collapsed months later, and billions in customer assets became tied up in bankruptcy. Users who held crypto in self-custodial wallets still suffered from falling prices, but they were not locked out by those platforms.
Every few years, the same lesson surfaces at a larger scale: platforms fail, and when they do,
custodial users can become unsecured creditors. Self-custody users avoid that specific risk.
Centralized exchanges have matured over time, but the basic custody risk remains. This is why crypto users often say, “Not your keys, not your coins.” If someone else controls your keys, you are trusting them to protect your assets.
How Has Self-Custody Evolved?
Self-custody has become easier as wallets have added better backups, clearer interfaces and stronger security tools. Below is a breakdown of how certain features have improved.
Seedless Architecture: One important development is the option to eliminate the 12- or 24-word seed phrase. Managing seed phrases is a major barrier for new users and a significant security risk due to potential social engineering or loss. Some hardware wallet companies use secure chips to manage private keys without requiring the user to record a
recovery phrase.
Simplified Backup: Instead of writing down a backup, some hardware wallet designs allow users to receive two or three identical cards. The private key is replicated across these cards, providing a backup system that can be easier to manage than paper backups and more user-friendly for some users.
Intuitive Interface and Services: Wallets today offer updated, well-organized market information for trading, swapping, and on- and off-ramping.
Transaction Simulation: To protect users from fraudulent DeFi contracts, wallet providers have integrated features that simulate and verify
transactions with a third party before execution. These tools can help protect users from bad actors and flag potentially fraudulent transactions before they are approved.
User-Focused Hardware Design: Hardware wallets have historically suffered from poor user experience, tiny screens, and limited buttons that add friction and can create security risks, but this is changing, with newer designs becoming increasingly accessible to non-technical users.
What Are the Risks of Self-Custody?
The main risk of self-custody is that users are responsible for protecting their wallets and approving transactions.
Whether receiving, sending or
staking digital assets, self-custody users are solely responsible for any assets lost through a transaction, hack, scam or mistake.
For larger or long-term holdings, it is generally safer to use a
hardware wallet than a
hot wallet, meaning a wallet connected to the internet. Hardware wallets can help protect against threats like remote hacking.
Author
Andrey Lazutkin is CTO of
Tangem, a hardware wallet company. He has more than 20 years of experience building and scaling technology products and previously served as head of mobile Development at Alpari. He is based in Dubai.
He holds a patent for secure secret data transfer via untrusted intermediary devices and has written about crypto security and self-custody.