In the crypto environment, custody solutions are the latest emerging technology. It provides different ways from self-custody wallets to institutional custody solutions to secure crypto assets. As we know, users are unable to secure their assets on their own and are at risk of hacking, so there is a need for custody solutions. The news this year, “Why are hackers so interested in cryptocurrencies?” has been the top-most heading. They have already stolen nearly $1.7 billion and more in the first quarter of the year. Research showed that they are interested because of the anonymity of the cryptocurrency. Transforming your money into cryptocurrency and using it without any legal name or address provides a benefit to hackers.
This raises a big concern about the safety of crypto assets. As the crypto market keeps on growing, everyone from a single user to an institutional user is worried about securing their crypto assets and performing the transactions fast and easily. Looking at the below-given crypto wallet table, we will start with custody solutions and their needs. Further, the type of custody solutions – custodial wallets have been elaborated on, their advantages and disadvantages, and their future estimation.
The custody solutions are the third-party providers that deliver security and storage solutions for crypto assets. The security of the crypto assets is the priority for any user, which establishes trust in the custodian. The crypto assets stored on the blockchain are highly secured due to the decentralized nature of the blockchain. The crypto-assets and their record of transactions are saved over the independent ledger that can’t be changed. Hence, the user can be assured that their crypto assets lying on the blockchain are the safest as compared to today’s banking system. The only way it can be misused or hacked is by using a private key. So, the main concern arises regarding the security of the private key that is used to access our assets on the blockchain. This is where the custody solutions come into play, securing the private key.
The types of custody solutions:
- Self-custody wallet: It is an act of taking responsibility for your crypto assets instead of trusting any third party. This can be done by using software, hardware, or a paper wallet for storing the private key.
- Exchange wallet: Here, the control of the public and the private key is given to the exchange but the user can access the assets online using the login credentials given by the wallet.
- Institutional custody solutions: Here, the service provider stores the private and public keys on the behalf of the customers. This solution is designed for institutional users and hence, comprises institutional-level security and insurance.
Need for Custody Solutions:
Today also, many institutional investors don’t buy crypto assets due to a lack of a secure way to store them. The main objective of introducing custody solutions in the market was to provide the user with a safeguard for the crypto assets. As the crypto assets include both local and global exchange operations, and also geographically condensed mining operations, the issue of security and regulatory compliance of the custodian is important.
Reasons you should consider using custody solutions:
- Security assurance: The main objective of designing the custody solution was to safeguard the crypto assets of the user. It can somehow minimize the responsibility of the user by storing and managing the crypto assets on their behalf.
- Operation efficiency: Storing the crypto assets with custody solutions could be much easier than managing them on your own. It provides an easy and convenient platform to access crypto funds, similar to Paytm or PayPal application. In case, the user holds the assets on their own they can become more vulnerable to hacking or can get stolen easily. Hence, a custody solution eases the management of your crypto assets.
- Usability: Many potential users may hesitate to invest because of the complex nature of the crypto market. The custody solution provides a simple user interface that can be adapted easily by all users from beginners to experts.
Therefore, custody solutions can be considered as an option to safeguard our crypto assets.
Which is more important – security or speed?
In the crypto world, there is no fixed answer to this question. Some people believe that increasing speed means compromising security, while others believe that without speed there is no efficient use of crypto. This raises a dilemma about which one should be preferred. However, the preference will always vary according to the need at that time. Let’s categorize different types of users based on their needs
- The beginners: The beginners are the users that have just entered the crypto world and are still exploring. These users will prefer both speed and security for their crypto assets. As a beginner, their priority would be to secure their assets even if they have a few hundred coins and they will also prefer speed to perform transactions or access their funds easily.
- The traders: The type of users that are more into trading and hence, will prefer speed over security to perform their transactions quickly. Here, for a trader, security won’t be a priority as they will only be holding a fixed amount of crypto in their wallet which they want to exchange.
- Company or institutes: The institutes will prefer security over speed. This is because for them securing a large amount of crypto is way too essential as compared to the speed of the transactions. They can wait for one or two days for their transaction to be implemented but can’t compromise the security of a huge amount of crypto assets.
Hence, depending on the requirements the users can prefer either one. Speed is the main concern in various cases but the security flaw can collapse everything.
Now, which type of custody solution is significant for you?
The type of custody solution that suits you depends upon your requirements. For instance, beginners will require an easy and convenient way to access their funds. This requirement will be fulfilled by using institutional custody solutions as they provide a simple user interface similar to popular online bank wallets like PayPal. Further, as the institutes or companies prefer security over speed, they can select self-custody wallets. These wallets will provide full control of crypto assets to the user. In this case, the private key is only known by the user, hence, securing it from any kind of security breach. Lastly, the traders will prefer using exchange wallets so that they can easily perform transactions by holding only the required amount of funds in these wallets. Hence, depending on the requirement the user can choose one solution.
Going further, we will be talking about custodial wallets in detail.
What are crypto custodial wallets?
Crypto custodial wallets are similar to regular wallets, which are used to store cryptographic public and private keys. Here, the control of the private & public keys is with the third-party custodial. This signifies that the third-party wallet will hold your private key on your behalf. The user can register with these wallets, log in to the system, and access the crypto assets. The user can access their crypto funds using the login credentials. The users can never access the network (blockchain) directly; it’s always using the third-party wallet. The third-party wallet is responsible for safeguarding the funds. By using the crypto custodial wallets, the users don’t need to worry much as it follows regulatory compliance to protect their assets.
Working of custodial wallets:
Nowadays there are so many options available in the market from which the user can select. After choosing a reputed custodial wallet, the user can create an account on it. The user can easily sign up as they do in other banking applications like PayPal. The only difference here will be that they will require you to complete KYC before using their services. The user can simply register using their email and mobile number. Then, they will be asked to submit a photo of government-authorized documents. After completing KYC, the user can access all services of the wallet. Here, the users are allotted a pair of private and public cryptographic keys. The user can share their public key with other users in order to receive funds and perform transactions.
The advantages and disadvantages of using a crypto custodial wallet:
The pros of using a custodial wallet are:
- Zero-cost transactions: The primary advantage of utilizing the custodial wallet is that it doesn’t require any fee. Yes, the user can easily and freely perform transactions using custodial wallets. A good example of this is Freewallet where you can perform transactions at zero cost.
- No risk in case login credentials are lost: Another benefit of using the custodial wallet is that in case you lose your credentials to log in to the wallet, you will have easy accessibility to the crypto assets. Despite taking all precautions, it is still possible that you may accidentally delete the wallet, forget the password, or reformat your device. Hence, by using a custodial wallet you can easily get your wallet back.
- User-friendly interface: These wallets provide an interface that a new user can understand easily and conveniently as they are the same as the popular online banking applications. The user can easily navigate through the wallet and implement the transaction, which also maximizes user participation.
- Backup facility: These wallets also provide a backup feature using which you can effortlessly redo a previous transaction.
The cons of using custodial wallets:
- Third-party control over your funds: As the name suggests, by using custodial wallets you are keeping your funds under the custody of a third party. You are not the sole owner of your private key here. Therefore, the third party can access or act on your crypto assets. For example, they may freeze your assets, limit the number of withdrawals, or block your wallet in case of any breach.
- Need document verification: Another mandatory rule of custodial wallets is to complete KYC (Know Your Customer) to perform transactions. The users can’t access various services of the wallet without verifying their identity. For this, the wallet may ask you to submit government-authorized documentation. Hence, this finishes the anonymity of the user, which is the basis of blockchain technology.
- No offline access: Another drawback of using a custodial wallet is that it requires the internet. To perform a transaction, you need minimum internet speed otherwise it will not happen. Hence, in areas where there is a low internet signal, the users need to wait until they have the minimum speed to perform a transaction.
- Still vulnerable to hackers: Apart from the high security provided by the wallet, there are still chances that it may get compromised. The custodial wallets have been targeted by hackers earlier also. For instance, BitMart experienced a security breach in 2021 where nearly $200 million in assets were withdrawn by hackers. However, the company said that they will compensate the victims.
Now, the question is “Are funds safe in custodial wallets?” or “Is there any other way to secure them?” As we know, with benefits there are drawbacks also. Prioritizing your requirements will help you choose wisely.
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With rising safety issues will people still prefer custodial wallets in the future?
Yes, people will prefer custodial wallets in the future as beginners are more concerned with performing transactions easily and quickly rather than considering the fact of who controls their private key. Further, the experts can utilize a custodial wallet to perform their instant daily transactions by keeping only the required crypto funds in it.
The user needs to consider the following security methods to safeguard their wallet:
- Use a safe internet connection to perform the transaction, and always keep your device and system secure from malware.
- Be aware of hacking attacks like phishing.
- Change the password regularly.
- Use multiple wallets. For example, the user can create one for performing the daily transaction and another to safeguard the rest of their crypto assets.
Hence, in the evolving crypto industry, it becomes your sole responsibility to protect your assets. Users should stay updated with the recent news on security attacks in the crypto world and how you can prevent your assets from them.
Conclusion:
Cryptocurrencies have been on a wild ride since 2011. The rise of the crypto world doesn’t only attract users but also hackers. The idea of anonymity has thrilled hackers. As cryptocurrencies are accepted globally, it has opened a new attack class where hackers can implement cybercrime without leaving a trace. With this emerging technology, as a user, the primary objective is to keep the crypto assets safe from malicious people. Hence, there are several approaches developed to resolve this issue.
The most famous approach is utilizing custody solutions to keep cryptographic private and public keys safe. We say how custodial wallets can be used to safeguard our funds. Moreover, it doesn’t provide complete security from hacking. Here, the private key of the user is under the control of a third party. Hence, in case there is any security breach of the third-party wallet, your assets will also be compromised.
So, what other options can be considered while securing crypto assets? Other than custodial wallets, there are exchange wallets and self-custody wallets, which we will be talking about in the coming blogs.
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