The unearthed coins — valued at around US$ 6 million — are believed to have belonged to a wealthy Briton who may have probably hidden them for safekeeping shortly after William the Bastard invaded England in 1066. I guess burying the money as a safekeeping measure was the medieval equivalent of being your own bank.
Unfortunately, if someone cuts off your head during a regime change or you lose your USB stick, all the money buried or stored in the thumb drive vanishes from circulation. This essentially means that it becomes out of reach for your heirs until recovered by archeologists or quantum computers.
But why would anyone want to become their own bank, especially in the crypto sphere?
“Not your keys, not your coins” is an idea encapsulated in the crypto sphere that essentially means that if your coins stored in a wallet do not have the private keys, then it is not really yours. This means that if you store your crypto assets with any third-party custodian, such as a cryptocurrency exchange, there is no guarantee that the crypto assets belong to you.
The primary reasons for storing your crypto assets in a wallet you control are pretty straightforward. Cryptocurrencies emerged as a solution to financial systems that centralized power away from users. By allowing peer-to-peer (P2P) transactions to take place, cryptocurrencies eliminated the need for intermediary financial institutions, becoming the first fully decentralized commercial systems of their kind.
As such, it makes no sense to hand over the control of your crypto assets to a third party, as this goes against the principles that cryptocurrencies are built on.
Drawbacks Associated with Entrusting Crypto Assets to Third Parties
There are two serious drawbacks associated with entrusting crypto coins to third parties: loss of control and security risks.
Loss of Control
If your crypto assets are stored with an intermediary such as a centralized crypto exchange, anything you want to use them for will be handled by that exchange. This means that you have essentially relinquished control of your assets to the crypto exchange. Losing control over your coins can become costly in some instances.
For example, suppose the exchange freezes the trade and withdrawals of the asset you own for upgrades, maintenance, or any other reason, such as the case with Zipmex and Celsius Network. In that case, you will be helpless to act, especially in the event of volatile market activity. It also means that your coins have limited potential returns. Over the past couple of years, we have seen the rise of proof-of-stake (PoS) chains that provide multiple ways for users to earn more from their assets.
Not having direct control over your assets limits your potential returns when it comes to DeFi services such as staking, yield farming, and lending and borrowing, and more. While some centralized exchanges can participate in DeFi services on your behalf, it usually comes with its own challenges.
Security Issues
Losing coins stored with an intermediary due to a hack is the most apparent issue you will likely encounter when entrusting intermediaries with your funds. As of this writing, the cryptocurrency markets have experienced 54 hacking events in which more than US$ 2.4 billion of users’ funds have been lost.
So far, the Mt. Gox hack of 2014 remains the most notorious attack that resulted in more than US$ 660 million of users’ funds being stolen. The quoted amounts do not consider the stolen user data and the undisclosed value of the stolen assets. As such, even in cases you do not become a victim of stolen funds, there is always a chance that your personal data will become compromised when hacking occurs on an exchange.
This problem is compounded when using hot wallet services that rely on internet connectivity to initiate financial transactions through web browsers. For example, any vulnerability on the wallet server where users’ verifications increase the chances of online spoofing and message interception. Under such an environment, hackers can easily steal your funds if the credential falls into the wrong hands.
What Is the Alternative?
Keeping crypto assets on an exchange makes sense in cases where a user does not own a lot of cryptos, trades frequently, or is comfortable exchanging security for ease of use. However, if you agree with the “not your keys, not your coins” mantra, you will need to look for alternative ways to store your crypto assets.
As a starting point, it is imperative that you use non-custodial wallets to manage your funds because you will have sole control over the private key. There are plenty of specialized non-custodial wallets out there that you can use to store your funds. These wallets are further categorized into two groups: hardware and software wallets.
Non-custodial hardware wallets — also called cold wallets — are external drives that store private keys offline for enhanced security. To access assets held in these wallets, you need to plug the device into your computer and manually confirm transactions through the device. Ledger Nano X and Trezor One are typical examples of non-custodial hardware wallets. Non-custodial software wallets, on the other hand, are applications — including web browser plugs — that you can download on your computer or mobile device. These wallets can directly access most public blockchains and require users to specify their words or seed phrases to access stored assets. Unlike hardware wallets, private keys are accessible online. MetaMask, Exodus, and Electrum are some common examples of non-custodial software wallets.
Even though you will need to technically connect them to the internet to transact, the signing of the transaction is conducted offline within the hardware before the payload is transmitted to the blockchain for confirmation. For this reason, even a malware-infected desktop or smartphone cannot access the stored assets.
However, while non-custodial wallets eliminate intermediaries, they require you to act responsibly to keep your keys safe. If you were to lose the keys, destroy the wallet, or even forget the password, then you cannot access your assets if you have not taken precautions to regenerate the wallet. In some cases, you may want to use a multi-signature (multi-sig) wallet that makes hacking more difficult because they require multiple private keys. Multi-sig wallets also reduce the dependence on one device because passwords are stored in various locations or gadgets.
Most importantly, you must take greater responsibility to safeguard the seed phrase (mnemonic phrase) from loss or theft. If you prefer to write down the seed phrase on paper, you must ensure its storage is safe. Alternatively, you could store the seed phrase in your bank’s deposit box. This way, you can always know where to locate it whenever you need it. On the other hand, if you prefer to store the phrase digitally on a device such as a flash drive, ensure you do not share the device with anyone else or plug it into an internet-enabled PC.
Conclusion
There are many choices you have when it comes to non-custodial wallets, with some being more secure than others. As always in crypto, you need to conduct your own research to find out which wallet fits your needs.
At Analog, we are building a universal wallet that will allow users to manage their assets and access dApps from a simple and easy-to-use console. Since Analog is an omnichain protocol, users will be able to seamlessly move assets across Analog-connected chains. This will not only unlock liquidity for users but also expand the wallet’s network of dApps and their utility.
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