Why Self-Custody Matters

Overview

The groundbreaking innovation of blockchain technology has given rise to a new decentralized, user-first economy, often referred to as “web3”. Web3 is built on top of decentralized public blockchains and aims to revolutionize the internet as we know it — by removing the middlemen and gatekeepers in the traditional system — to provide value back to the user.

While the list of web3 use cases continues to expand as new value is realized in industries around the globe, the first main use case that struck gold was decentralized finance (DeFi). Access to the traditional financial system is siloed off for many around the world, filled with gatekeepers and middlemen who take most of the value, leaving the scraps for the end user. DeFi flips the narrative on its head, unlocking the potential to power a new and improved, on-chain, transparent financial system.

To achieve the full potential of DeFi where users have full control over their financial future, they need to first have full control over their financial assets. That’s where self-custody comes in. Our web3 future depends on frictionless access to the new system that is being built on the public blockchain, without having to worry about third parties making decisions on your behalf or monetizing your behavior without your consent. Self-custody enables this future.

What Is Self-Custody?

Self-custody is the removal of a third party’s control over your personal assets. When you deposit money into your bank account, you are relinquishing control of your assets. Banks have full control to do what they see fit with your finances.

Very similarly in crypto, when using a centralized exchange like Coinbase or Kraken, you also give away control of your assets to these exchanges. In black swan “bank run” scenarios, where the bank or exchange goes bankrupt, you can lose these assets for good. Coinbase recently made waves in the news when it disclosed this fact earlier this year.

This is why you may have heard the phrase “not your keys, not your coins” in the cryptosphere. You don’t have full control over your financial assets until you withdraw them from the exchange to a self-custody, non-custodial wallet. The owner of the wallet has sole possession over the digital assets because they control the private key. These wallets take the form of either a cold hardware wallet like a Nano Ledger or a browser extension “hot wallet” such as MetaMask, Phantom, or Keplr.

Asset Control and Ownership

Non-custodial wallets rely on a private key for security. The key typically consists of 12–24 words, otherwise known as your “seed phrase”. No one can hack your wallet or access funds without having the seed phrase. Your key, your coins.

When you create a self-custody wallet and generate your seed phrase, you have sole ownership of the assets you deposit. You are free to explore the world of DeFi and Web3, straight from your wallet. Trade, invest, borrow, and lend without the approval of a third party.

Risks When Opting for Centralized Services

In just the last year, multiple centralized exchanges have experienced insolvencies and halted withdrawals on billions worth of crypto assets.

A popular exchange Voyager halted withdrawals with up to $1.3 billion missing, only to date returning $270 million. Another exchange Bexplus allowed users to withdraw for 24 hours before freezing all assets on the platform. Centralized exchange services have control of your private keys and the assets you deposit with them are no longer yours. These exchanges have the ability to freeze your accounts, limiting the tokens you can buy and trade. Even trusted exchanges like Binance and Coinbase run the risk of halting withdrawals. Meanwhile, operating directly with web3 infrastructure allows for decentralized, open access to facilitating transactions.

While these insolvencies caused chaos in the centralized finance world, DeFi held up extremely well during these conditions, with even Celsius paying back their on-chain loans before repaying customers on their platform. DeFi avoids these risks through self-custody by restricting access to just the user. With security comes freedom. Freedom to enter new ecosystems with the ability to benefit from innovative protocols that further financial independence.

Are There Risks In Self-Custody? With Great Power Comes Great Responsibility

The short answer is yes. Like all aspects of crypto, there are risks to having control of your seed phrase. If you lose your seed phrase, there is no hope of getting access to the funds stowed in a wallet. There is very little customer support for non-custodial wallets so running into problems can be very cumbersome. You can also be very susceptible to phishing scams so never send or receive funds from people or wallets you do not know. For more information on the best ways to securely store your seed phrase — see here.

How Kado Helps

Many new crypto users typically onboard through a centralized exchange and buy crypto for their first time on something like Coinbase. As users gain exposure to the industry, become more crypto-native, and understand the risks of custody; they will want to on-ramp funds directly to non-custodial wallets and web3 applications without the centralized exchange intermediary. Combine this with the fact that more crypto applications are being built with real product market fit that will attract non-crypto users, the industry needs a platform to enable both new users and crypto-natives to easily onboard web3.

How Can I Send Funds to a Self-Custody Wallet?

Kado will be the go to for users and businesses to seamlessly move between fiat and self-custodial crypto, in the most secure, cheap, and fastest manner possible. Skip the reliance on 3rd parties, onboarding friction, and fees — go straight from your bank account to your self-custody wallet, and back, with Kado. We’re also building solutions beyond wallets, including solutions for fiat payments directly into applications and smart contracts themselves.