Self-custody is essential for users who want more control and security over their digital assets. Instead of relying on third parties to hold their keys, self-custody allows individuals to manage their own private keys and funds. However, taking on this responsibility means understanding the details involved. This article covers ten essential terms for self-custody users, providing the foundational knowledge to manage and secure crypto effectively.
What is self-custody?
Self-custody refers to users taking full control and responsibility for assets, such as cryptocurrencies, tokens, and NFTs, by directly handling private keys to their wallets. You get to manage your assets directly instead of relying on third-party services like exchanges or custodial wallets.
What is a self-custody wallet?
A self-custody wallet, also known as a non-custodial wallet, is a type of cryptocurrency wallet in which the user has complete control over their private keys and funds. In this setup, no third party (like a bank or an exchange) can access the user’s assets.
You are responsible for safeguarding your private keys, and if you lose access, no intermediary can help you recover them. Common examples of self-custody wallets include hardware wallets like Tangem and Ledger, and software wallets like MetaMask and Exodus.
Benefits of self-custody
The benefits of self-custody include:
- Full ownership: You have complete control and ownership of your assets.
- Privacy: Your assets are not linked to your identity.
- Security: You are responsible for securing your assets, reducing the risk of theft or loss due to third-party failures.
- Decentralized: You participate in the decentralized economy without relying on centralized intermediaries.
However, self-custody also comes with:
- Increased responsibility: You are fully responsible for the security and management of your assets.
- Technical requirements: You need technical knowledge to manage your assets and private keys.
- Risk of loss: If you lose your private keys or compromise your wallet's security, you may lose access to your assets.
Self-Custody Wallet vs. Exchange Wallet
Here’s a table comparing self-custody wallets and exchange wallets:
| Feature | Self-Custody Wallet | Exchange Wallet |
|---|---|---|
| Control of Private Keys | User controls private keys and owns assets | Exchange controls private keys; users rely on the exchange |
| Security | User responsible for security (private keys, passwords) | Exchange offers security, but is a target for hackers |
| Convenience | Requires manual management and technical knowledge | Easy for trading, buying, and selling; user-friendly interface |
| Risk of Third-Party Failure | No third-party risk; user fully owns assets | Risk of exchange failure, hacks, or regulatory issues |
| Asset Access | Full control, access at any time | Access dependent on the exchange’s operational status |
| Best Use Case | Long-term holding, full ownership | Frequent trading, buying, or using exchange-specific services |
This table highlights the differences between self-custody and exchange wallets, showing how each suits different preferences.
Basic terms in self-custody
Here are some basic terms related to self-custody:
Hardware wallets
A hardware wallet is a special device designed to store your digital assets, like cryptocurrencies or NFTs, securely. It's a physical device, like a small computer, that you can hold. Hardware wallets are built to protect your assets from hackers, cyber-attacks, and even physical damage.
A hardware wallet generates and stores your private keys, which are used to access and manage your digital assets. When you want to make a transaction, you connect your hardware wallet to your computer or mobile device, and it securely signs the transaction without exposing your private keys. This way, your assets remain safe, even if your computer or internet connection is compromised.
Public and Private Keys
Public and private keys are integral to ensuring the security of cryptocurrency assets when utilizing a hardware wallet.
A public key serves as a digital address for receiving cryptocurrency transactions. It does not reveal sensitive information and can be safely shared with others, similar to sharing an email address.
A private key is akin to the password for your email address. It is a distinctive and confidential alphanumeric code that enters your cryptocurrency assets. This key functions as a digital signature when approving transactions, validating your ownership of the assets. Remember the adage, "Not your Keys, Not your Coins" – safeguarding your private key's confidentiality is crucial. If someone obtains access to it, they can take control of your cryptocurrency assets.
Recovery phrase
A recovery phrase, seed phrase, or mnemonic seed is a list of words that serve as a backup for your private keys. It's like a secret code that unlocks your vault. A seed phrase is generated when creating a crypto wallet, typically 12-24 words. This phrase is used to restore your wallet and access your assets if you lose access to your device.
Your recovery phrase is the key to recovering your digital assets, so keeping it safe and secure is crucial. If you lose your recovery phrase, you risk losing access to your assets forever. That's why storing your recovery phrase in a secure location is essential. Never share your recovery phrase with anyone; it gives them access to your assets. Remember, your recovery phrase is like a precious gem – keep it hidden and protected!
Under no circumstance will any Tangem representative ask for your recovery phrase via email, customer support, website, or any other form of communication.
Passphrase
A passphrase is an extra layer of security that functions as an additional word added to your recovery phrase. It is crucial not to share your recovery phrase with anyone. It alone grants access to your standard wallet. Each unique combination of ‘recovery seed + passphrase’ grants access to a corresponding unique hidden wallet.
Hot wallet
Hot wallets are cryptocurrency wallets connected to the internet, making them convenient for frequent transactions. These wallets can be desktop applications, mobile apps, or web-based services, allowing users to send and receive cryptocurrencies quickly. The primary advantage of hot wallets is their accessibility; users can easily access their funds from any internet-enabled device, facilitating everyday use and trading.
However, this convenience comes with increased security risks. Since hot wallets are online, they are more vulnerable to hacking, phishing attacks, and malware.
Multi-Signature (Multi-Sig) wallet
Multi-Signature, or Multi-Sig, is a security feature that requires multiple private keys to authorize a transaction. Instead of relying on a single key, Multi-Sig setups typically require a predefined number of keys (e.g., 2 out of 3) to approve a transaction, enhancing security and reducing the risk of unauthorized access. This is commonly used in cryptocurrency wallets and smart contracts to improve security and distribute trust among multiple parties.
Custodial and non-custodial wallets
A custodial wallet is a crypto wallet where a third party, such as an exchange or service provider, holds and manages its private keys. You rely on the provider for security, transactions, and recovery. This type of wallet is user-friendly but less secure since you do not have full control over your funds.
Non-custodial wallets give you control over your private keys and allow you to manage your funds independently. You are responsible for the security and backup of your keys. This type of wallet offers greater security and control, but requires more technical knowledge and responsibility.
Understanding these terms helps users manage their cryptocurrencies securely and independently.
Frequently Asked Questions
Is coinbase wallet self-custody?
Yes, Coinbase Wallet is a self-custody wallet unlike the regular Coinbase app, which is a custodial platform where Coinbase holds the private keys for users. This means users of Coinbase Wallet have full control of their private keys and the assets stored within the wallet.
What is a self-custodial wallet?
A self-custodial wallet is another term for a self-custody or non-custodial wallet. This system's users are solely responsible for managing their private keys and assets. No third party is involved, ensuring the user has complete ownership and control over their funds.
Is MetaMask a self-custody wallet?
Yes, MetaMask is a self-custody wallet. It is a popular browser extension and mobile wallet that allows users to store, send, and receive cryptocurrencies while maintaining full control over their private keys.
Is Trust Wallet self-custody?
Yes, Trust Wallet is a self-custody wallet. It allows users to store, manage, and trade cryptocurrencies while keeping full control over their private keys, meaning no third party has access to the user's funds.
What is the best self-custody crypto wallet?
Finding the best self-custody wallet depends on your preferences, such as the type of cryptocurrency you want to store and its security needs. Popular options include, Tangem Wallet, Ledger Nano X, Trezor, MetaMask, Trust Wallet, and Exodus.
Is Exodus a self-custodial wallet?
Yes. Exodus is a wallet that allows you to control your private keys and fully own your assets.
Is BlueWallet self-custody?
Yes, BlueWallet can be used as a self-custody wallet, especially for Bitcoin. However, it also offers custodial services if users do not manage their private keys. In its non-custodial setup, users control their Bitcoin and private keys.
Is a Self-Custody Wallet safe?
Like all self-custody wallets, the security largely depends on how well the user protects their private keys