The Difference Between Custody and Self-Custody

The recent Loopring Smart Wallet hack brought about the topic.

Let’s explore what it is all about and how Custody and Self-custody differ.

Exploring Wallet Security Levels

Hackers exploited Loopring’s smart wallet through the two-factor authentication (2FA) system. They got into Loopring through the 2FA by either phishing links, an insider job, or direct hacking. Let’s examine what custody and self-custody are all about.

What is Custody? 

Custody in crypto wallets is more than the wallet provider seeing your private keys. Let’s use a clear example: PayPal and Venom, for instance, do not see your credit card numbers. At the same time, Coinbase can’t access your wallet’s private keys. Your private keys are in secure environments known as Hardware Security Modules (HSM).

Storing your private keys in HSMs keeps them away from other eyes. Customers do not see them. So, custody is all about control, not only security. It works on two concepts: Positive control and Negative control.

• Positive Control: Here, the wallet provider can perform user transactions without user interference. If the owners of your wallet company move your assets when they update their software, that’s a positive control.
• Negative Control: In this case, the wallet providers can stop you from accessing your funds. A clear example is a business shutting down without allowing you to access your assets. That’s negative control.

Source: X

What is Self-Custody?

In the case of self-custody, you can control your assets without interference from your wallet provider. You control and manage your keys. Also, you can store it offline by writing it on a notepad.

You can also retrieve your keys without using centralized recovery methods. The risk is that you’ll take responsibility if you misplace your private keys. All in all, self-custody gives you control over your assets. Here is an example of how self-custody can end.

Source: X

What is Hybrid-Custody? 

Hybrid custody falls between Custody and Self-custody. Here, the backend authentication management provider and your wallet provider control your keys.

Your keys are on your device, but your provider manages some authentications. Hybrid Custody balances control and convenience, so there is some security and control.

Source: X

Custody as a Spectrum

Imagine a seed phrase written on a piece of paper (self-custody) and a service that stores users’ seed phrases on their server (Custody). All these are at different ends.

The legal implications of custody vary by law and the services offered, and they change over time. Positive control is the most accepted definition. Regulations in the U.S. and E.U. are increasing safeguarding rules. 

Conclusion

Custody and self-custody are not a matter of good or bad. Transparency is the most crucial thing in crypto when deciding what to use. If the wallet provider is open about their operations, that’s a valid point to check further.

Disclaimer

The information discussed by Altcoin Buzz is not financial advice. This is for educational, entertainment, and informational purposes only. Any information or strategies are thoughts and opinions relevant to the accepted levels of risk tolerance of the writer/reviewers and their risk tolerance may be different than yours. We are not responsible for any losses that you may incur as a result of any investments directly or indirectly related to the information provided. Bitcoin and other cryptocurrencies are high-risk investments so please do your due diligence. Copyright Altcoin Buzz Pte Ltd.

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