As centralized services fail in droves, self-custody alternatives prove their critical usefulness once more. Since the demise of FTX, crypto investors have emphasized the significance of holding money in self-custodial wallets. However, self-custody might be frightening, which is why we’ve compiled a best practices guide for keeping money secure and on-chain.
The Crypto Community Reacts to the FTX Collapse
Many crypto users are questioning how they should safeguard their crypto holdings in the aftermath of the FTX catastrophe. FTX had a reputation for dependability and credibility before to its abrupt collapse last week. By purchasing stadium naming rights, paying lavishly to US politicians, and collecting crypto, FTX and its primary figurehead Sam Bankman-Fried created an image of strength by buying stadium naming rights, donating heavily to U.S. politicians, and acquiring crypto companies struggling with liquidity issues. Even crypto veterans were fooled into thinking it was relatively safe.
The industry is struggling with the aftermath of FTX’s demise. A few large crypto firms, notably Tether and Kraken, were quick to declare that they were unaffected by the FTX meltdown; nevertheless, it is plausible that they had exposure to organizations who were. After lending platform Genesis Global Capital announced that it was stopping redemptions and new loans due to the market instability created by FTX, cryptocurrency exchange Gemini has suspended its Gemini Earn program.
It’s uncertain how far the FTX epidemic will spread, but crypto users should carefully consider placing their funds in self-custody in the interim. Unlike custodial wallets, self-custodial wallets do not require you to trust a third party like Coinbase; only you have access to your cash. However, you will bear complete responsibility—if you lose your private keys, you will have no recourse. This tutorial provides an overview of self-custody solutions to assist cryptocurrency users in keeping their assets safe.
Wallets, both cold and hot
Self-custodial wallets exist in a variety of shapes and sizes, but the first distinction to make is between cold and hot wallets. The phrase “hot wallet” refers to wallets that are always online. For on-chain activities, crypto users often connect to hot wallets. They can communicate with DeFi applications, NFT markets, and other Web3 applications.
They are often available as browser plugins, such as MetaMask and Keplr. A hot wallet is similar to a physical wallet in your pocket in that it keeps modest amounts of money for day-to-day spending, but it is not advisable to put your life savings in it.
There are several varieties of cold wallets, but the Ledger and Trezor hardware wallets are the most popular. Cold wallets vary from hot wallets in that they are unplugged from the Internet while not in use, making them far more secure. Cold wallets, on the other hand, are less handy for daily usage, which is why it’s important having a hot wallet or two for your on-chain activities.
Creating a Hardware Wallet
In terms of cold storage, Ledger and Trezor are the industry leaders. Trezor has two variants to choose from: the $213 Trezor Model T and the $67 Trezor Model One. Ledger also has two products: the Ledger Nano X, which costs $160, and the Ledger Nano S Plus, which costs $85. All four of these wallets support a variety of blockchains, cryptocurrencies, and NFTs (however Trezor requires a third-party program to see NFTs). Take the time to choose which one best meets your requirements.
Hardware wallets are more expensive than other crypto wallets (which are usually free), but considering that cold storage is widely acknowledged as the most secure way to store crypto, anyone concerned about keeping their cash safe permanently should consider purchasing one. Consider it the cost of security.
Once you’ve settled on a wallet, place your order directly with the manufacturer. It is critical not to purchase a used cold storage wallet since there is no way of knowing whether it has been tampered with.
You must write down your seed phrase after receiving and configuring your hardware wallet. A seed phrase is a string of 12 to 24 random phrases that can be used to recover your account if your hardware wallet or pin code is lost.
Write down your seed phrase carefully on a piece of paper and put it somewhere secure.
Use no digital devices at all; saving your seed phrase should always be a totally analog operation. It is critical that you never enter your seed phrase into your computer, mobile device, or cloud services.
Hacks, illegal screenshots, and keystroke tracking are all possible on devices. Take no images of your seed phrase, as they may also be compromised.
It is then totally up to you to keep your seed word secure in the actual world. Some people choose to take advantage of a bank’s physical security by placing their seed word in a safety deposit box.
While maintaining your seed phrase on paper is OK, some crypto users prefer employing fireproof techniques such as carving the seed phrase in metal (if you’re not ready to go to this expenditure, you may try placing your device in a fireproof security bag if you’re concerned about fire damage).
And, because it’s impossible to anticipate every contingency, it’s good keeping a backup or two in case the worst happens and your primary copy is lost or destroyed.
You don’t want anyone stumbling on them, so treat each duplicate with extreme caution.
Finally, operating as the ultimate custodian of your funds necessitates judgment. The fewer people who know where your wallet is, the more secure it is.
How to Make Your Own Cold Wallet
If you want to move your coins off-exchange but are concerned that obtaining a hardware wallet will take too long, you may attempt an alternate solution: putting up one of your Internet devices as a bespoke cold wallet.
To do so, you’ll need an outdated mobile phone (without a SIM card) or an old PC. Again, it’s best not to buy one from an unknown source; instead, use an old one of your own, or, at the at least, borrow one from a trustworthy friend or family member.
To make the gadget as clean as possible, perform a factory reset. Connect the device to a home WiFi network (not a public network) and install an Ethereum browser wallet, preferably MetaMask. Take note of the seed phrase.
Create a second MetaMask account on a device that you use frequently. Make a note of that seed phrase as well. Save the second MetaMask address to the “cold storage” account you created. Then, make your new cold wallet gadget forget its WiFi password (or move it out of network range) and turn it off.
By doing so, you will basically build an offline-secured hardware wallet. You will still need to connect to the Internet on sometimes to transfer funds from your “cold” MetaMask wallet to your “hot,” but this is at least one option for creating a wallet with few Internet interactions. MetaMask and Ethereum are unlikely to be hacked, and if you only interact with your “hot” MetaMask account, there is no reason for your “cold” MetaMask to be abused by malevolent smart contracts.
However, this is simply a short-term remedy. A “custom-made” hardware device like this does not offer the same level of security as a Ledger or Trezor device. In reality, this approach should only be used as a stopgap until you can purchase a hardware wallet designed expressly for the purpose.
Last Thoughts
Self-custody may appear scary at first, but it is well worth the time and effort. Whatever centralized firms do with their customers’ monies, self-custody wallets allow users to keep and access their assets safely under their own care, without fear of an insolvency crisis, withdrawal freeze, or legal proceedings.
However, it is equally important to analyze the points of failure in the assets you choose to store. Keeping USDT or USDC in cold storage will not safeguard its value if Tether or Circle fail.
While self-custody wallets put users in charge of keeping their crypto assets secure, they also give them total control over their assets, which is one of the crypto movement’s basic ideas. As recent events have demonstrated, there is ample reason to adhere to crypto’s favorite mantra: “not your keys, not your coins.”
