The crypto ecosystem is seeing an increase in the demand for regulations and standardized operations. Until now, centralized and decentralized exchanges have dominated discussions about cryptocurrency custody and trading.
However, methods for storing and managing digital assets such as cryptocurrencies have recently gained popularity. This is where you’d find modern crypto custody services, which are essentially independent cryptocurrency storage and security systems.
In this article, we will look at what cryptocurrency custody is and some of the best cryptocurrency custody solutions available on the web.
What Is Custody?
Cryptocurrency custody solutions are self-contained storage and security systems used to store large amounts of tokens or digital assets to prevent them from being stolen or lost.
Custody solutions are one of the most recent innovations to emerge from the cryptocurrency ecosystem, and they are expected to usher in institutional capital.
Custodial solutions are third-party entities that hold the private keys to the user’s funds in the cryptocurrency industry. They are the only ones who have the ability to send and receive the user’s coins. A custodial approach is used in almost all exchanges because it allows them to provide a better user experience.
How Crypto Custody Works
Crypto operates on the blockchain foundation, and as the name implies, cryptographic security is a fundamental aspect of cryptocurrencies. Key management contributes to the cryptographic security of assets and allows for the custody of digital wallets via private keys.
The institutional crypto custody solutions, on the other hand, hold the private keys to assets on behalf of the owner. The custody solution for crypto ensures that no other party has access to a user’s private keys.
The security of any asset is a major concern for crypto custody, as investors prioritize security when allocating assets to custody services. On the other hand, there are many inherent features in cryptocurrency that provide security assurance. To begin with, you can find representations of crypto assets on the blockchain which are impossible to modify.
What Are Cryptocurrency Custody Solutions?
Simply put, cryptocurrency custody solutions are third-party providers of cryptocurrency storage and security services. Their services are primarily aimed at institutional investors, such as hedge funds, who own significant amounts of bitcoin or other cryptocurrencies.
The solutions typically combine hot storage, or crypto custody with an Internet connection, and cold storage, or crypto custody that is not connected to the Internet.
Both types of storage have advantages and disadvantages. Hot storage, for example, is linked to the Internet and thus provides greater liquidity. However, because of their online exposure, hot storage options may be vulnerable to hacking.
Cold storage solutions provide increased security. However, due to their offline nature, it may be difficult to generate liquidity from crypto holdings on short notice. Vault storage is a hybrid of the two types of cryptocurrency custody solutions, in which the majority of funds are kept offline and can only be accessed with a private key.
Types Of Custody Solutions
Here are the three main types of crypto custody services you can find for individual as well as institutional investors.
Self-custody
One of the foremost options for individual crypto custody solutions would obviously refer to self-custody solutions. Take control over your crypto assets with hardware, software, or paper wallets according to your convenience.
Self-custody crypto solutions enable you to store the private keys to your crypto assets using hardware, software, or paper. The benefits of self-custody solutions include increased security and control over your assets. However, you must accept responsibility for your asset, as well as the risks of hacking and asset loss.
Exchange Wallets
The next common entry among cryptocurrency custody solutions would be exchange wallets.
Exchange wallets are solutions in which investors give exchanges control and management of private and public keys. Investors, on the other hand, would have easy access to their public and private keys via an online wallet.
Such solutions are appropriate for institutional crypto custody, where the exchange is responsible for managing private keys. While exchange wallets provide significant simplicity and ease of access for managing crypto-asset custody, they also pose certain counterparty risks.
Third-party Custodian
Third-party custodians are the final type of entry among crypto custody services. Third-party custodians are service providers who store digital assets on behalf of their customers. Third-party custodians, on the other hand, provide the option of including custom-defined features and controls for controlling asset management.
Third-party custody services provide exceptional institutional-grade security as well as insurance for institutional crypto custody. Standardization with clearly defined rules and controls for managing crypto assets could provide a promising value.
Furthermore, third-party custodians provide greater flexibility and security, albeit at a higher cost appropriate for institutions.
Keys Storage
As you can see, the various types of cryptocurrency custody solutions store investors’ private keys. Custody solutions provide security for crypto assets by securely storing investors’ private keys. Custodians could store private keys in hot storage, cold storage, or even smart contract wallets and multi-signature wallets.
- Hot storage is an online method of storing crypto assets that allow for online custodianship of your crypto. Hot wallets allow you to use a digital private key to gain access to a specific asset. They are, however, extremely vulnerable to hackers.
- Cold storage is another common type of private key storage mechanism in crypto custody services. Cold storage of private keys, as the name implies, focuses on offline storage of private keys. Cold storage necessitates the use of a private key in order to access the offline digital wallet and reduce security vulnerabilities.
- Another mechanism for storing private keys in crypto custody solutions is a multi-signature wallet. In addition to allowing online custodianship of crypto assets, multi-signature wallets require multiple approvals for transactions. Multiple users could access the decentralized wallet, indicating a significant advancement in cryptocurrency custody solutions.
- A smart contract wallet would also provide important information about the types of private key storage available in cryptocurrency custody solutions. The smart contract wallet provides custody of smart contract tokens as well as proof of ownership via online custodianship. Control by code, a private key, and a master account are also features of smart contract wallets.
Conclusion
Crypto custody refers to the process of protecting assets from theft. Custodians, who are third parties who can be hired to look after your crypto, act as guardians of your money, whether it is cash, securities, gold bars, or virtual assets. Custodians have been around since the 1960s and are one of the traditional banking system’s pillars.
