“Not your keys, not your coins” is a saying that gets passed around a lot in this space. What it means is that if you store your crypto assets on an exchange or with any kind of third-party custodian, you have no guarantee of ownership.
What can happen if you store your crypto on an exchange
After at least seven high-profile cryptocurrency exchange hacks this year alone, cryptocurrency users are aware of the dangers.
But it’s not only hackers that are after their Bitcoin. What happens if the exchange goes bust or its accounts are frozen by a regulator?
Inside jobs, exit scams, Ponzi schemes, and even a suspicious death made up the lion’s share of the $4.4bn lost in cryptocurrency crime in 2019.
Not your keys, not your coins.https://t.co/Hj03HEe1ML
— Bitcoin (@Bitcoin) May 22, 2019
You get the message. Store your crypto safely either in a hardware wallet or in a secure software wallet that allows you to store your crypto offline.
So, now you’re in full control of your crypto assets, what could possibly go wrong?
Being your own bank is a terrifying prospect
When it comes to proper storage of your digital assets, you now get full points for keeping them safe. However, having any significant amount of crypto wealth stored in a hardware wallet, mobile phone, or toolbar extension also isn’t ideal. And it raises some serious issues.
What happens, for example, if you lose your wallet or it gets damaged in a house fire? Unless it’s a wallet with the private keys on the front and no backup, like Bobby Lee’s Ballet, you should be fine as long as you have your recovery seed. But what happens if you lose that?
Proper storage of private keys has become one of the biggest issues in the space of late. However, according to a Chainalysis study from 2017, between 30 to 50% of all Bitcoin (some estimated $20bn in value) will likely be lost and out of circulation due to users losing their private keys.
More recent polling uncovered that almost one-fifth of all cryptocurrency holders have lost digital assets due to mismanaged wallets.
According to Myungin Solomon Lee, Head of Product and Growth at Squarelink: “Studies suggest nearly four million Bitcoin have been lost to date, but the reality is this number is likely much higher.”
He continues, “Mishandling private keys is an issue that affects everyone in the crypto community and has directly translated to the loss of tens of millions of dollars in digital assets.”
With more than 42 million digital wallets in existence, do we really know that we’re managing them correctly?
The other problem with backup seeds
Let’s say that you store your crypto safely, have the backup seed written down in a few places just in case, and have no issue finding it when you need it. What then?
Squarelink’s co-founder and CTO, Alex Patin, says that there’s a custodial catch issue when it comes to that as well.
Most private key recovery solutions are “not truly non-custodial and rely on companies like Google to create OAuth tokens. Since Google is a centralised authority, a malicious employee with access could arbitrarily create access tokens for every user leveraging that technology, and fetch all the shards on hosted decentralised nodes containing PK information.”
This is why Squarelink has released the first non-custodial private key recovery for several dApps using its wallet management tool.
Currently, the company that provides easy access to multiple dApps via just one interface is providing the only non-custodial private key recovery platform for cryptocurrency and blockchain applications.
All other solutions rely on OAuth providers such as Google or custodial key-management services like Amazon Cognito.
What this means for the future of crypto storage
Squarelink’s recovery methods increase security and use familiar processes for users to retrieve and reset their private keys. Its setup allows users to recover private keys through any combination of challenge questions, Universal Second Factor (U2F), or email with PGP encryption.
“Squarelink facilitates account recovery through encrypted ‘Recovery Seeds’ that only the user can access, ensuring no third parties are granted access,” adds Patin.
“Today, there are countless threats to a digital wallet, yet so few security solutions. We must equip users with easy-to-use tools to not only keep assets safe but to also recover them should they be mishandled.”
While the solution is only available to a handful of dApp wallet users right now, it certainly provides a glimpse of the future of storing crypto.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.