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 individuals taking full control and responsibility for their digital assets, such as cryptocurrencies, tokens, and NFTs. Users manage their assets directly through their own wallets instead of relying on third-party services like exchanges or custodial wallets.
In self-custody, you possess and manage your private keys, which are used to access and transfer your assets.
- Personal wallets: You use a wallet under your sole control, such as a hardware or software wallet you manage locally.
- Decentralized control: You have complete autonomy over your assets without reliance on intermediaries.
- Security: You are responsible for ensuring the security of your assets, using measures like strong passwords, 2-factor authentication, and keeping your private keys safe.
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.
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.
Seed phrase
A seed phrase, recovery 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 seed phrase is the key to recovering your digital assets, so keeping it safe and secure is crucial. If you lose your seed phrase, you risk losing access to your assets forever. That's why storing your seed phrase in a secure location, like a safety deposit box, is essential. Never share your seed phrase with anyone; it gives them access to your assets. Remember, your seed phrase is like a precious gem – keep it hidden and protected!
Under no circumstance will any Tangem representative request your seed 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 seed phrase. It is crucial not to share your recovery seed with anyone. Your recovery seed 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)
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 one where a third party, such as an exchange or service provider, holds and manages your 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.
A non-custodial wallet lets you control your private keys and 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.