Without wishing to wallow in the mire, last week’s Binance hack was another giant yellow highlighter to the fact that cryptocurrency exchanges are vulnerable.
The wave of attacks on them is relentless, with already more than $1bn stolen from exchanges in cryptocurrency’s short history. Users’ funds sitting on an exchange are at risk. They need to learn how to protect their assets correctly and take responsibility for them. The future of digital currency management is, therefore, non-custodial. And that has a few implications.
Cryptocurrency users must learn to protect their assets
Despite the scary statistics, many cryptocurrency users still choose convenience over security. Now that the price of Bitcoin is rising and the Binance hack is becoming an ever-distant memory, how many people will dismiss the need to keep their own private keys?
According to a recent survey by non-custodial wallet providers Ambo and MyCrypto, more and more users are becoming aware of the need to step up and protect their digital assets.
They found that some 66.5% of crypto holders are using non-custodial and mobile storage solutions to protect their funds. This is definitely a good step in the right direction. The majority of users, it seems, understand the need to keep their digital assets off of an exchange. MyCrypto founder Taylor Monahan told Coin Rivet:
“One of the core philosophies of cryptocurrencies is redistributing power – taking it away from massive, centralised parties and giving it to individuals. While centralised exchanges help to bridge the gap between the traditional and new world, storing your assets in these centralised exchanges is no different, nor safer, than storing your assets in a bank.
As the technology matures, I think we’ll see more platforms similar to MyCrypto and Ambo – easier-to-use solutions that avoid the common pitfalls of centralised exchanges and custodial platforms.”
However, the findings also show that some 33.5% of cryptocurrency users are still trusting exchanges with their funds. Not only are these users at risk of opportunistic hackers, but they’re also at the mercy of the actions of the exchange.
The exchange can force early closure of traders’ positions. It can become insolvent and disappear with users’ funds, or the only person with access to the cold storage wallets could suddenly pass away. If users don’t choose non-custodial solutions, they have multiple threats looming over them.
What are non-custodial solutions?
Non-custodial solutions mean that the exchange or wallet provider is not a custodian and therefore does not hold on to users’ funds. This places the responsibility for the assets squarely on the user.
They can gain access to peer-to-peer transactions on the blockchain without an intermediary (without an exchange). This keeps their funds away from hackers and safe from any undesirable activities of an exchange.
Most non-custodial solutions today take the shape of mobile wallets and hardware wallets such as Ledger and Trezor.
Co-founder of Ambo, Jack Lipstone, told Coin Rivet:
“People who are buying cryptos do not want to rely on a third-party to store all of their information, most importantly their private key which is used to access and control their funds. These people are looking to wallets that provide the user with full custody of their crypto on their iPhone with a place of their choosing to back up their information.
This is better than trusting custodial wallets, as exchange’s have control of your funds and could compromise your funds at any time whether there is a hack or a court decision resulting in halted trading of tokens.”
There are also exchanges such as Digitex Futures that are working on providing users with non-custodial accounts. This has obvious advantages for the users but also for the exchange. It won’t be a giant cash-cow target for a hacker as it has no funds to steal.
The problem with non-custodial solutions
Non-custodial solutions provide users with far greater security since the attack surface is infinitely smaller. However, there is still a small chance that their account or wallet could be hacked. Non-custodial investment app Abra explains it well with this analogy:
“Hacking a centralised exchange or wallet is like trawling the ocean for fish with a net versus a wallet like Abra, which is like fishing with a rod in the bathtub inside a locked house inside a locked compound with security guards on every corner.”
That small threat aside, users being in control of their own funds is an extremely freeing possibility. It’s also pretty terrifying to anyone with a propensity for losing important items.
With no one in the middle, users become their own bank. They must safeguard their private key and store their backup phrase in multiple safe places. If they lose this crucial information, they also lose access to their funds for good.
Final thoughts
With cryptocurrency being such an attractive target to hackers, it’s clear that the future of digital currency management is non-custodial. Solutions like MyCrypto, Ambo, Digitex Futures, and Abra all show great strides forward in this area.
However, the learning curve and responsibility that comes with using a non-custodial solution may still be too great for some. As cryptocurrency continues its leaps toward mass adoption, users will need more solutions and a lot more education about the implications of storing their own funds.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.