Key Definitions:

- Custodial wallets are controlled by a custodian like an exchange (ex. Binance, Coinbase) while convenient, these third-party providers own your wallet's private keys and control your assets. If something happens to the exchange, as we saw with FTX, you could lose all your assets.

- Non-custodial wallets (also called self-custodial wallets) put you in complete control of your private keys. You are the sole custodian of your assets, meaning no third party can access, freeze, or restrict your funds. However, this also means you bear full responsibility for keeping your wallet secure and backing up your seed phrase.
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Mintlayer Back to Basics #1

I’m sure you heard the saying “Not Your Keys, Not Your coins,” repeated often throughout web3 circles. Plus constant discussions on self sovereignty with terms non-custodial and self-custodial wallet getting thrown around constantly in crypto circles. Most new to the blockchain space hear this and just nod their heads pretending to understand. But what does self-custody actually mean in crypto?

In traditional finance, we've grown accustomed to custodians managing our assets. A custodian in this context is typically a bank or financial institution that controls your money. While the closest comparison to self-custody in traditional finance would be owning a safe at home with your assets locked inside. You hold the key to the safe and you control access directly without any intermediaries. In crypto currency this “Safe” is a non-custodial wallet in which you are the sole holder of its private key. 

So why would anyone need to be the custodian of their own assets? To answer that, we need to go back to the birth of Bitcoin.

The Birth of Bitcoin and the Case for Self-Custody

Bitcoin was created in the aftermath of the 2008 financial crisis as a direct response to fears about bank failures and centralized financial system vulnerabilities. People watched major banks collapse and governments intervene, sometimes preventing citizens from accessing their own money.

History has shown this pattern repeatedly throughout the globe. Cyprus in 2013 saw forced haircuts on savings. Greece in 2015 limited withdrawals to 60 euros per day. Lebanon starting in 2019 restricted deposit access as the economy spiraled. These weren't theoretical risks but real events that stripped people of control over their wealth.

Bitcoin was designed as a peer-to-peer electronic payment system, allowing direct transactions without middlemen. The promise was simple but revolutionary and it attracted early adopters who had lost trust in traditional institutions.

Understanding Custody in Crypto

When we talk about custody in cryptocurrency, we're really talking about who controls the private keys to your wallet. This is fundamental to understanding ownership in the blockchain world.

Here's an important clarification: when someone says they store crypto in their wallet, that's not technically accurate. Your cryptocurrency isn't stored in your wallet at all. It lives on the blockchain network, maintained by every single node. Each node stores a complete copy of the blockchain's history, every transaction ever made.

What your wallet actually stores is the secret information that allows you to manage a specific account. This secret is called a private key.

Every address on a blockchain has a key pair. The public key acts as a unique identifier, like your account number. Your blockchain address is derived from this public key, and it's safe to share with anyone who needs to send you funds. The private key, however, is different. Anyone with access to a private key has complete power to manage the assets at that address. This is why your wallet must store private keys securely. If someone gets your private key, they get your crypto. Period.

Custodial vs. Non-Custodial

There are two fundamental approaches to holding cryptocurrency: custodial and non-custodial solutions.

Custodial wallets are controlled by third parties, typically centralized exchanges like Coinbase or Binance. When you use these platforms, your private keys are held by the exchange. They custody your assets on your behalf. 

Non-custodial wallets (also called self-custodial wallets, the terms are interchangeable) require you to manage your own private keys. You are the sole custodian.

The difference seems minimal on the surface, but the implications are profound.

Using a custodial wallet is like keeping your funds in a bank. You're protected from direct theft, but you depend entirely on the institution to access your money. The bank can access your accounts. If the bank fails, mismanages funds, gets hacked, or faces regulatory pressure, your assets are at risk. And because cryptocurrency exchanges often aren't insured and may be registered offshore, you typically have little recourse if something goes wrong.

Using a non-custodial wallet is like storing cash in a physical safe. Only you control when and how you spend your funds. But you're also responsible for keeping it secure. If someone gains access to your safe or if you lose the combination, the money is gone. Similarly, anyone who gets your private keys can take your crypto.

This is why people say "with self-custody comes responsibility." The control is entirely yours, but so is the full risk.

Types of Self-Custodial Wallets

There are a few main wallets with each type offering different benefits between security and convenience.

Software Wallets (also called hot wallets) are applications you download (like Mojito Wallet) to your computer or phone that store your private keys on the device itself. While convenient for frequent transactions, they can be vulnerable to online threats like malware, phishing attacks, and hacking. 

Paper Wallets are your private keys printed on paper, usually as a QR code. They're extremely secure from digital threats since they're completely offline. However, they're not user-friendly and vulnerable to physical damage, fire, water, or simply getting lost.

Hardware Wallets offer the best of both worlds. These physical devices let you manage your assets through a digital interface while keeping your private keys completely offline in a secure chip. Since the private keys never touch your internet-connected computer or phone, hardware wallets are much better protected from malware and online attacks. They vary significantly in security features, user experience, and supported assets, so research carefully before choosing one. Mintlayer’s $ML coin has a custom integration for Trezor and Ledger hardware wallets with complete integration coming in the near future. 

Practicing Self-Custody Safely

Self-custody comes with responsibility. Mistakes can be costly, and blockchain transactions are irreversible. If you lose your crypto to a scam or a mistake, you're unlikely to get it back.

Your seed phrase (also called a recovery phrase or mnemonic phrase) is the master key to your wallet. It allows you to restore access to your accounts regardless of which wallet provider you use or whether you still have the physical device.

From the moment you create a wallet, you must record your seed phrase correctly. Any mistake in spelling or word order will prevent you from recovering your accounts later. Write carefully and double-check.

Never store your seed phrase digitally. No phones, tablets, computers, or cloud storage services. All digital devices are potentially hackable and cloud services get breached regularly.

Store your seed phrase on something physical. For most people, paper works fine. Some prefer to engrave it on metal for protection against fire and water damage. Whatever you choose, keep it somewhere safe from theft, damage, and prying eyes.

Never give anyone your Seed Phrase 

The crypto space is full of scams designed to trick you into revealing your seed phrase or private keys. Legitimate wallet providers will never ask for this information. If someone requests your seed phrase, even if they claim to be from support, it's a scam. No exceptions.

Be cautious about which websites you visit and which applications you download. Phishing attacks using fake websites that look identical to real ones are common. Always verify URLs carefully before entering any information.

Closing Thoughts

Self-custody isn't for everyone, and that's okay. It requires a certain level of technical understanding and personal responsibility. But for those who value financial sovereignty, privacy, and access to the full crypto ecosystem, it's the only real option. However for those new into the space it's always great just to get started any way possible: start with a custodial wallet with an exchange, learn the basics then later on you can start a non-custodial wallet.

The choice between custodial and self-custodial solutions ultimately comes down to trust. Do you trust yourself more than you trust institutions and are you willing to take responsibility for your own security in exchange for complete control?

Bitcoin and other cryptocurrencies were created to give people another choice instead of pure reliance on traditional finance institutions. Self Custody through non-custodial wallets helps to fulfill the original dream that Bitcoin sought to achieve.

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