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Self Custody Meaning

Jun 13, 2023 | Updated Jul 19, 2023
Self custody is when a user takes full control and responsibility of holding and managing their digital assets without relying on third-party intermediaries.

What is Self Custody in crypto?

Cryptocurrencies and NFTs operate on what is known as “web3”, which are sites and applications built on blockchain technology. A central tenant of web3 is the idea of decentralization, which removes third-party intermediaries from transactions and allows users to exercise complete ownership over their assets. This is a departure from the centralization that is common in traditional financial settings like banks. In web3, users can choose to be their own banks, and they can do this through self custody.

Cryptocurrencies power web3 and users can choose to store them on custodial or non-custodial wallets. Custodial exchanges come with a degree of centralization just like traditional banks. Non-custodial wallets allow the user to become their own bank and be in charge of their asset security. Keeping your Bitcoin in a non-custodial wallet is similar to keeping carats of gold in your own vault. As long as you safeguard your private keys, your asset will always remain safe and intact. 

Asset custody and the element of trust 

Up until the last few years, people had to entrust their assets to centralized institutions like banks and the government. They had little authority over these assets once they were deposited in the bank. In the Web3 space, users who opt to use centralized exchanges surrender their private keys and trust the third party to handle them safely. This creates a strong need for trust between users and the centralized entity.

Self custody removes the need to trust the government or a third party, because users are in charge of their own assets. You are your own bank and security. 

What is a Self-Custody Wallet?

A self-custody wallet is a decentralized medium to store cryptocurrencies. The wallet secures a user’s private keys which is required to access the cryptocurrencies on the blockchain. 

Keep in mind that no matter what wallet or storage type you choose, through self-custody or centralized exchanges, cryptocurrencies and digital assets are not actually ‘stored’ in your wallet. They are stored on the blockchain, and your wallet has the private keys that grant you custody of your assets on the blockchain. Think of a wallet as a debit card –  your money is stored in a checking account (not your actual debit card), but the card gives you access to use those funds at any time. 

Self custody wallets are either ‘hot’ or ‘cold. ‘Hot wallets’ are applications that are mobile and PC compatible and connect to the internet, while cold wallets are physical hardware wallets that store your private keys offline. The Ledger nano wallet is an example of a cold wallet. 

Collateralization

Collateralization is the process through which an individual secures a loan using their valuable assets as insurance.

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Smart Contract

A smart contract is an agreement in the form of a computer program that automatically executes when predefined conditions are met.

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Atomic Swap

An atomic swap is a peer-to-peer trading mechanism that facilitates the exchange of digital assets across separate chains without using intermediaries. It enables users to transfer cryptocurrencies via smart contracts.

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