Self-custody Your Funds vs. Using A Centralized Solution
One of the greatest strengths in cryptocurrency is that it doesn’t need a financial institution. Once you’ve stepped into the crypto world you will learn that there are so many different ways to use and store your assets.
What is a self custody wallet?
A self-custody wallet is a place where you can store digital assets and money, such as cryptocurrency. Self-custody wallets, also known as non-custodial wallets are needed in order to transact on blockchain-based financial applications. This means that only you will have full possession and control of your digital assets and the security of your assets are your own responsibility.
The wallets are secured with a unique private key, similar to a password, that is used to access your funds. The wallets are secure as long as the user keeps it secured. This is really important because you, the user, are the weakest link. Learn more about how private keys work at Ledger.
There are several types of self-custody wallets, each differ in the way they provide access to your digital money. Some wallets can be used offline on an external hard drive like Ledger that ensures multistage security processes to access funds, and others are online such as Metamask that uses a mobile app or browser extension wallet. Other wallets include Linen, Wallet Connect, Trust Wallet, Trezor and more.
What is the difference between self-custody and centralized?
Centralized wallets work by companies “looking after your assets” for you. There is less personal responsibility as your wallet will be managed by a third-party intermediary in the company. This means the provider will transact on the blockchain and look after the private key on the user’s behalf. The wallets will be accessible through an app or online browser, similar to an online banking system.
If you’re using a centralised wallet you may only be able to use your assets on that particular platform, for example on the centralised app Ziglu. This is not the case for self custody as the wallets, where users are able to use their assets on many different platforms.
In DeFi using a self-custody wallet is a must. To stake your crypto or invest in fixed-income products in DeFi you need digital money, with stablecoins like USDC and DAI or other cryptocurrencies. Self-custody wallets create the link between these currencies where you can then put your assets to work.
When you have a self-custody wallet consider this checklist:
- Double check the addresses and passwords
- Keep your holdings and details private
- Be careful with your mobile devices
- Be wary of holding all your assets in one place
Because you have full control over your assets, it is therefore also your responsibility to keep your wallet secure; and, depending on the type of wallet, your private key safe. As a user you must assess the risks and take your own precautions.
If you have a centralised wallet consider the following:
- You don’t have full control of your assets
- Your withdrawal rights could be temporarily frozen
- You may lose funds if the company goes bankrupt
There may be times when you don’t have autonomy over your assets when you use a centralised wallet. Last month, in June, Celsius was an example of how this can happen. The company froze all user accounts, stopping withdrawals and swapping transactions, due to “extreme market conditions”. Although this may be to protect user funds, it can come at the cost of user liberty and may lose user trust.
So, why is it better to choose self-custody?
Particularly in times with unpredictable market conditions like now, it’s important to use your crypto in a safe way and be assured you can always make your own choices. This is why using self-custody is better than centralized. With self-custody, no matter the state of the crypto market, you are your own bank, all day, every day. You can choose where to put your assets, and you have the freedom to withdraw or sell your funds at any time.
Using self-custody wallets lets you experience DeFi’s potential. Whether you want to stake your assets, play-to earn in crypto games, buy NFTs or interact with other DeFi products, self custody is the starting point.
July 15, 2022