Custody of cryptocurrency refers to the safeguarding and management of crypto assets. The security of crypto assets is all about the keys.

Crypto wallets are where cryptocurrencies are ‘stored’ and are used to send and receive funds. Wallets contain a public and private key pair that are used to grant access to funds. 

What is a Self-Custody Wallet?

A self-custody wallet, also known as a non-custodial wallet, is a type of cryptocurrency wallet where you, the user, have full control over your private keys and, therefore, your crypto assets. Unlike custodial wallets (e.g., those provided by exchanges like Coinbase or Binance), where a third party manages and secures your private keys, self-custody wallets give you complete ownership and responsibility for securing your funds.

Key Features of a Self-Custody Wallet:

1. Private Key Ownership:

In a self-custody wallet, you hold your private keys. These keys are the cryptographic proof needed to access and manage your cryptocurrencies. Private keys are often stored locally on your device or provided as a seed phrase (a series of 12-24 words) during wallet setup. This seed phrase allows you to recover your wallet if you lose access to your device.

2. No Third-Party Involvement:

No central authority or service provider holds or manages your keys. This gives you more privacy and control but also places full responsibility on securing your wallet.

3. Increased Security:

Since no third party is involved, the risk of your assets being stolen due to a hack or breach of an exchange or custodian is reduced. However, the security of your wallet depends entirely on how well you protect your private keys. Your funds cannot be recovered if your private keys or seed phrase are lost or stolen.

4. Freedom and Autonomy:

You are not reliant on an exchange or custodian's policies, fees, or operational stability. You can access your funds anytime without restrictions.

5. Interacting with Decentralised Applications (DApps):

Self-custody wallets often allow users to interact with decentralised applications (DeFi, NFTs, etc.), as you have full control over signing transactions directly from your wallet.

Examples of Self-Custody Wallets:

• MetaMask: A browser extension and mobile wallet that allows users to interact with Ethereum-based decentralised applications.
• Trust Wallet: A mobile wallet supporting multiple cryptocurrencies, offering complete control over private keys.
• Ledger: A hardware wallet that stores private keys offline for enhanced security.
• Exodus: A desktop and mobile wallet with an easy-to-use interface supporting many cryptocurrencies.
• Electrum: A lightweight Bitcoin wallet that gives users full control over their private keys.

Advantages of a Self-Custody Wallet:

• Full Control: You have full ownership and control of your digital assets.
• Greater Privacy: No need to go through KYC (Know Your Customer) procedures or give personal data to an exchange or custodian.
• No Third-Party Risk: Your funds are not at risk of being frozen or lost due to a third-party service provider's insolvency, hacking, or regulations.

Disadvantages of a Self-Custody Wallet:

• Responsibility: You are fully responsible for the security of your private keys. If you lose your keys or seed phrase, your funds are irrecoverable.
• Complexity for Beginners: Managing private keys and securely backing them up may be challenging for users new to cryptocurrency.

A self-custody wallet gives you complete control over your cryptocurrencies by allowing you to manage your private keys. While this offers more security and privacy than custodial wallets, it also requires you to take full responsibility for safeguarding your assets.

What is the Difference Between a Custodial and a Self-Custody Wallet?

The key difference between a custodial wallet and a self-custody (non-custodial) wallet lies in who controls the private keys and, consequently, who has control over the cryptocurrency assets. Here’s a detailed breakdown of the distinctions:

Private Key Ownership:

Custodial Wallet: In a custodial wallet, a third party (such as a cryptocurrency exchange or service provider) holds and manages the private keys on behalf of the user. The user doesn’t have direct access to their private keys and is essentially trusting the custodian to safeguard their funds.

Self-Custody Wallet: In a self-custody wallet, the user has full control and ownership of their private keys. No third party has access to the private keys, meaning the user is fully responsible for securing their funds.

Control Over Funds:

Custodial Wallet: The third-party custodian controls the funds. They have the ability to freeze or restrict access to your assets, depending on their policies or external factors (e.g., government regulations, exchange hacks, etc.). While you can access your funds through their platform, ultimate control remains with the custodian.

Self-Custody Wallet: The user has full control of their funds at all times. No one can restrict, freeze, or seize the assets in a self-custody wallet. However, this also means that if the user loses access to their private keys or seed phrase, there is no way to recover the funds.

Security:

Custodial Wallet: Security is largely dependent on the custodian's security measures. While reputable custodial services use advanced security practices (e.g., multi-factor authentication, cold storage, etc.), the funds are still vulnerable to exchange hacks or internal mismanagement. In the event of a hack, users might lose their funds if the custodian does not have insurance or adequate protection in place.

Self-Custody Wallet: Security is entirely the user's responsibility. If properly managed (e.g., with strong password protection, secure backups of seed phrases, and hardware wallets), self-custody wallets can be highly secure, as they remove the risk of third-party hacks. However, if the user fails to secure their private keys or loses them, the funds are permanently lost.

Ease of Use:

Custodial Wallet: Generally more user-friendly and convenient, especially for beginners. Custodians typically provide a familiar user interface similar to traditional banking apps, and users don’t need to worry about private key management. Most exchanges also offer built-in features like buying, selling, and trading directly from the wallet.

Self-Custody Wallet: While many self-custody wallets are designed to be user-friendly, managing private keys and seed phrases requires more attention and understanding from the user. For beginners, the responsibility of securing keys might feel daunting, and if mistakes are made, it can lead to the permanent loss of funds.

Recovery and Support:

Custodial Wallet: If a user loses access to their account (e.g., forgets their password), the custodian often provides a way to recover access through customer support, such as by verifying identity via email or other personal information. This is similar to traditional financial institutions.

Self-Custody Wallet: There is no customer support for lost private keys. The only way to recover a self-custody wallet is by using the recovery seed phrase provided when setting up the wallet. If the seed phrase is lost, there is no way to restore access to the wallet or the funds.

Privacy:

Custodial Wallet: Since custodial wallets are typically offered by regulated exchanges or platforms, users often need to undergo Know Your Customer (KYC) procedures, which involve sharing personal identification details. As a result, the custodian can track and monitor user transactions, reducing privacy.

Self-Custody Wallet: Users generally maintain more privacy with self-custody wallets. There is no need for KYC, and users can transact without revealing personal information. However, transactions are still recorded on the public blockchain.

Access to Decentralised Applications (DApps):

Custodial Wallet: Custodial wallets typically offer limited or no access to decentralised applications (DApps), as they are focused more on storage and basic transactions.

Self-Custody Wallet: Many self-custody wallets allow users to interact with decentralised applications (DApps), decentralised finance (DeFi) platforms, and non-fungible token (NFT) marketplaces.

Fees and Transactions:

Custodial Wallet: Some custodians charge fees for certain types of transactions (withdrawals, trades, etc.). Additionally, custodial platforms may have limits on withdrawals or impose certain restrictions.

Self-Custody Wallet: Users can set their own transaction fees (within the rules of the blockchain they are using) and are free to move their assets without third-party approval. There are typically no service fees for holding or using a self-custody wallet, apart from blockchain network fees.

Summary of Differences:

Custodial Wallets are suitable for users who prefer convenience, ease of use, and don’t want the responsibility of managing their private keys. However, they come with risks like potential hacking, lack of control, and limited privacy.

Self-Custody Wallets provide more security, control, and privacy, but require users to manage their private keys responsibly. They are ideal for users who want full ownership of their funds and are comfortable managing security themselves.

Can self custody wallets be hacked?

Yes, self-custody wallets can be hacked, though the likelihood and method depend on several factors, including how well the user secures their wallet and private keys. While self-custody wallets are considered more secure than custodial wallets since the user holds their private keys, they are still vulnerable to various types of attacks if not properly protected. Here’s how a self-custody wallet can be hacked and how to mitigate these risks:

1. Malware and Phishing Attacks:

• Malware: If your computer or mobile device is infected with malware, it could log your keystrokes (keyloggers) or steal sensitive information, including your private keys or seed phrase.
• Phishing: Hackers often send deceptive emails, messages, or websites that trick users into revealing their private keys or seed phrases by posing as legitimate wallet providers or exchanges.
• Mitigation:
  • Keep your device free of malware by using antivirus software.
  • Be cautious when clicking links or downloading files from unknown or suspicious sources.
  • Always double-check URLs to avoid phishing sites that look like legitimate wallet services.

2. Social Engineering:

• Attackers may use psychological manipulation to trick users into sharing their private keys or seed phrase. This could be done via impersonation, fake support, or offering help to fix "wallet issues."
• Mitigation:
  • Never share your private keys or seed phrase with anyone, even if they claim to be from customer support.
  • Be sceptical of unsolicited requests for information related to your wallet.

3. Weak Passwords and Poor Security Practices:

• If your wallet requires a password (e.g., for accessing a desktop or mobile wallet), a weak or easily guessable password could make it easier for hackers to gain access.
• Mitigation:
  • Use strong, unique passwords for your wallet and any accounts associated with your crypto activities.
  • Consider using a password manager to store and generate strong passwords.
  • Enable two-factor authentication (2FA) when available to add an extra layer of security.

4. Loss or Exposure of Private Keys / Seed Phrase:

• The private key or seed phrase is the most critical component of a self-custody wallet. If someone gains access to these, they can steal your funds.
• Mitigation:
  • Store your seed phrase in a secure, offline location (e.g., written down and stored in a safe). Do not store it on your computer, phone, or online.
  • Consider using a hardware wallet for extra protection, as it keeps your private keys offline and requires physical interaction to confirm transactions.
  • If possible, split the seed phrase into multiple parts and store them in different secure locations.

5. Compromised Hardware:

• Hardware wallets, while highly secure, can still be hacked if they are tampered with before you receive them (e.g., buying from unauthorised sellers) or if your computer is compromised when using them.
• Mitigation:
  • Buy hardware wallets only from trusted, official sources to avoid tampered devices.
  • Always update your hardware wallet's firmware to the latest version to ensure protection from known vulnerabilities.
  • When using a hardware wallet, ensure the device you're connecting to (e.g., your computer) is free of malware.

6. Man-in-the-Middle (MITM) Attacks:

• This occurs when an attacker intercepts the communication between you and your wallet, particularly when interacting with DApps or signing transactions.
• Mitigation:
  • Use secure internet connections, such as trusted Wi-Fi or a VPN. Avoid using public or unsecured Wi-Fi networks.
  • Double-check transaction details before confirming, especially when using hardware wallets, as the wallet screen will show what you are approving.

7. Fake Wallet Apps:

• Attackers sometimes create fake wallet apps that mimic legitimate ones to steal private keys or seed phrases.
• Mitigation:
  • Only download wallet apps from official sources (e.g., the official website or trusted app stores).
  • Check reviews and verify that the app you are downloading is the legitimate version by confirming the developer and app details.

8. Smart Contract Vulnerabilities:

• Some self-custody wallets interact with decentralised applications (DApps) and smart contracts. If a smart contract has a vulnerability, it could lead to a loss of funds.
• Mitigation:
  • Be cautious when interacting with new or unverified smart contracts, particularly in decentralised finance (DeFi).
  • Only connect your wallet to trusted DApps with well-audited smart contracts.

9. Physical Theft:

• If someone gains physical access to your device (computer, phone, or hardware wallet), they might be able to steal your funds if the device is not properly secured.
• Mitigation:
  • Protect your device with strong passwords or PINs.
  • Enable encryption on your devices.
  • Use a hardware wallet for an extra layer of protection since even physical access requires approval on the device for transactions.

10. Supply Chain Attacks:

• If the supply chain of your wallet or hardware wallet is compromised, attackers may introduce vulnerabilities or malware into the product before you receive it.
• Mitigation:
  • Purchase wallets directly from official websites or trusted resellers.
  • Verify the integrity of any wallet software or hardware before using it.

Summary of How to Protect Your Self-Custody Wallet from Hacks:

• Secure your private keys and seed phrase offline, never sharing them or storing them digitally.
• Use strong passwords and enable two-factor authentication (2FA) for any connected accounts.
• Keep your devices free of malware and use antivirus software.
• Use a hardware wallet for long-term storage or for holding significant amounts of cryptocurrency, as it keeps your keys offline.
• Avoid phishing attempts by carefully verifying links, emails, and apps you interact with.
• Only interact with trusted DApps and platforms to avoid smart contract exploits.

While self-custody wallets offer high security and control, they are not immune to hacks, especially if best practices are not followed. Proper security measures and vigilance are key to keeping your assets safe.