Overview

One of the core components of blockchain technology is the concept of “private keys” which may be viewed as the mechanism to authorize a transaction on the blockchain. One of the fundamental decisions one must make is who is in control, or custodying, those keys. One may choose to have a trusted third-party custody those keys or one may choose to safeguard those keys themselves, or self-custody. Self-custody in the context of cryptocurrency means “the user holds their own private keys”. There are many ways a user can safeguard these keys, such as a mobile wallet on your mobile phone, a wallet application on your desktop, or a special hardware device known as a hardware wallet. One of the challenges relates to how to backup these private keys in a manner that is convenient as well as secure. When a user generates a new mobile wallet or hardware wallet, for example, they are given a “seed phrase” to back up. The seed phrase, typically 12 or 24 random words, is a mechanism used in many modern wallets to use as a foundation in which other keys may be generated from. This convenience results in only needing to backup and safeguard that seed phrase since that seed can be used to regenerate the same keys. This approach is powerful, with several security advantages over custodial solutions providing it’s done in a safe and secure manner. There are, however, some disadvantages to self-custody. Let’s dive into the pros and cons of managing your own crypto keys.

Pros of Self-Custody Wallets

The first major pro of self-custody is self-sovereignty — part of why crypto exists is so that users can truly own their digital money by holding their own keys, rather than having to trust a third party with your keys as well as your private information. Having to trust a third party is known as “counterparty risk”. This method transfers the responsibility of safeguarding those keys to that other party and you are now relying on their security. By holding one’s own keys, a cryptocurrency user avoids counterparty risk in their key ownership.

A second advantage is that of options. There exists a multitude of cryptocurrency wallets for every level of security, technical knowledge, or desired currencies and tokens. Depending on the user’s desired level of security, one could use a simple mobile wallet or go all the way up to a hardware wallet or even utilize more complex configurations such as requiring multi-signature. Moreover, many popular wallets are open source and audited by the professional development and security community, and closed source wallets have strong user bases as well with many offering a bug bounty program to reward ethical hackers who find vulnerabilities.

It is also easy to move between self-custody wallets — there is no concern of lock-outs, know your customer regulations (KYC). There are often more supported cryptocurrencies available, as new tokens or currencies that aren’t yet available on exchanges can be used via self-custody software.

These wallets offer the highest level of accessibility for all around the world. A user only needs to install wallet software on a mobile phone to start transacting with cryptocurrency. There is no need for identification, a bank account, or addresses to use a simple self-custody wallet. This is a huge advantage for those without access to traditional banking services.

Cons

There are, however, some disadvantages of self-custody wallets over custody accounts. Most of these revolve around backups and issues of security hygiene. First, a user must take sole responsibility for the safeguarding of their keys, and therefore their money. If the user loses their wallet (such as their phone), and loses backups of their seed phrase, they will lose access to their coins with no options for recovery.

The user must exercise diligence in securely backing up their seed phrase (private keys) and maintaining access to those backups. These should be stored in multiple secure locations and tested to ensure recovery works if the primary wallet is lost. If a backup is made or stored improperly, the user can lose access to their coins.

Every user of a self-custody wallet must take ownership of their security — both digitally and physically.

You can learn more about types of wallets and custody by visiting https://cryptoconsortium.org/articles.