Crypto self-storage: “not your keys, not your coins”

The implosion of the interlocking construct of centralized providers – from Celsius to BlockFi to FTX and their collateral damage – reaffirms the age-old Bitcoiner credo. “Not your keys, not your coins” ultimately means nothing more than independence from central providers and counterparties.

Bitcoin’s pseudonymous founder Satoshi Nakamoto wanted to remove the middlemen in a transaction with his creation, so that use between two parties is permissionless for all and resistant to censorship. The respective owners of “crypto wallets” are also responsible for their safe storage. The use of the digital values ​​does not depend on any third party and cannot – as long as an internet connection is guaranteed – be restricted. The use of centralized services somewhat compromises this vision. A return to the underlying values ​​of blockchain technology should protect users from some future dangers.

Self-reliance: an unrealistic ideal?

Mt. Gox, Celsius, BlockFi, FTX…the list of failed CSDs grows every year. Despite this, crypto holders continue to turn to these services – FTX alone had over 1 million active users before its collapse. The reason for this is obvious: self-sustaining is not only cumbersome, it also prevents active trading of different cryptocurrencies – Bitcoin, Ether, Solana, etc. are not all based on the same blockchain after all. Crypto exchanges played a key role in the blockchain ecosystem early on. What was initially considered a point of contact for trading quickly established itself as a repository for customers’ crypto holdings.

Despite increased comfort, this poses additional risks for users. Finally, the control and ultimate ownership of the cryptocurrencies is transferred in addition to liability to a third party. On the one hand, crypto exchanges are susceptible to malicious/negligent practices by managers (FTX debacle). On the other hand, they are also popular targets for hackers and can be subject to easily overlooked bugs. Ultimately, the customer pays the price.

Lack of regulation of the area

Banking legislation protects to a considerable extent the storage of securities, commodities or cash deposits by securities and commodity brokers or banks. Any custodial relationship can potentially be characterized as a debtor-creditor relationship between the custodian and the customer and not as a transfer of assets. And if any measures fail, the central bank is always ready to intervene. There are neither clear rules nor a central bank-like authority for the custody of cryptocurrencies.

Instead, probate courts could well consider the portfolio holdings to be the property of the insolvent exchange rather than the property of its clients. In this case, the customers would simply be ordinary unsecured creditors of the exchange, entitled only to a pro rata distribution of the exchange’s remaining assets. Even if shares were ultimately considered client property, access to their shares would be compromised in the long term. The example of Mt. Gox – which is still pending after nine years of litigation – clearly proves this fact,

Exchanges and third-party providers dilute ownership

The trend towards third-party trust is contrary to the philosophy and purpose of bitcoin. The business sector that grew up around bitcoin and its underlying blockchain technology seems to have failed to stay true to its cypherpunk origins. Exchanges and other providers hold the private keys for the account holder, the customer, and sometimes third-party companies. Exchanges then impose withdrawal limits, freeze accounts and find other ways to arbitrarily limit users’ access to their money. The end customer is dependent on a central authority and its business policy, which has recently become a reality in the insolvencies of well-known providers.

Blockchain technology democratizes trade and creates an alternative for the cashless. It enables a decentralized locker for digital values ​​that is accessible 24/7. The key to this safe can consist of 12 words (seed phrase) that are kept in a safe place and used only in an emergency. Self-care is therefore a privilege that users should make good use of. Ultimately, total losses due to stock market insolvency are not only tragic and financially devastating, but actually avoidable (not your keys, not your coins).

Options for self-care

Bitcoin and other digital assets are stored in a digital wallet. There are roughly three categories of use, which are also differentiated by the type of wallet. A hot wallet is usually operated via a browser, smartphone app or open source software and is constantly connected to the Internet. It is used in daily use to perform transactions or perform special functions in smart contracts. It is referred to as “hot” because external attackers can theoretically take over the computer or mislead the owner with false facts.

A cold wallet is disconnected from the internet. There are generally two types: hardware wallets and paper wallets. A hardware wallet is a device that securely stores the private keys of cryptocurrencies. Theoretically, this could be a simple USB plug, but this does not entail additional functionalities. Well-known hardware wallets such as Trezor, Ledger and Bitbox offer different web interfaces for online services. An app from the manufacturer acts as a proxy, so the wallet itself is never connected directly to the Internet. The software initiates a secure request to the device, which must be confirmed by the user before a transaction is signed by the device. The web browser only receives signed and therefore immutable commands from the software.

With an OpenDime or a paper wallet, it is possible to complete a transaction without the internet and blockchain. A paper wallet is an offline mechanism for storing cryptocurrencies. The public address and private key are printed offline or written down on a piece of paper. It is also referred to as a physical wallet/purse because there is no interface to the digital world. But if the pieces of paper are lost, so are the assets, which is why the hardware wallet has established itself as a common standard.

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