The weirdos on Twitter, myself included, finally got to ya, eh? You’re no longer comfortable with keeping your coins on Centralized Exchanges (CEXes) either because you’ve been convinced that it’s bad for decentralization, or you want to be in full control of your assets without other third parties being able to run away with them, or you want to invest in super-early stage projects and win big.
Those are perfectly noble and understandable preoccupations but bear in mind that self-custody – as in, direct ownership of your assets – is not without its dangers. If you make a bad enough mistake, there’s no recourse, no person who can revert a transaction, you’re completely on your own.
To paraphrase/butcher a quote from Spiderman: self-custody gives you great power but with that freedom comes great responsibility. You are your own bank, so you are in charge of security and storage.
I don’t say this to scare you, but merely to show you the side that these types of guides often omit. More often than not, content like this is hastily written by SPOs as a means of attracting newbie delegation. So it’s not in their best interest to acknowledge potential difficulties or risks.
However, there are great benefits to be had as well. For example, you’ll be able to invest in cutting edge projects months before they make it to CEXes, and at a fraction of the price. This is where the big gains are had, not with the already vetted and institutionalized assets.
In this article, we will explore the basics of what self-custody is and how to take control of your keys, so that you can get properly started on your crypto journey.
So what exactly is self-custody and why should I bother?
Crypto is the financial Wild West, we are speedrunning through a facsimile of the entirety of financial history within a handful of years. And on this journey, the crypto industry started to develop something that looked and acted much like a bank.
For most people, from a functional standpoint, CEXes are like the bastard child of a bank and a stock brokerage. They are corporations that allow you to trade and keep your crypto assets safe.
Of course, as with a lot of things in crypto, even using this definition is bound to make some people angry. The common rebuttal to mentioning that CEXes are safe is by pointing at the long list of CEXes that have stolen people’s funds throughout the years.
That may be true, but that’s mainly because most CEXes are fly-by-night operations with very little to lose for stealing the money. It’d be like opening a bank account in some unknown financial entity in a random country with very lax legal oversight. If it disappears overnight and you trusted it, honestly that’s on you.
Broadly speaking, if you stick to the well-known CEXes, the type that have been in operation for many years in regulated countries, and are so large that they get listed on the stock market, the risks are minimal they’ll run away with your cash.
The payoff of stealing the funds vs just continuing to make money hand over fist for the foreseeable future very much aligns with your and their interests. The situation changes when there are unexpected, but somewhat inevitable economic shocks or government clampdowns though.
It may not happen tomorrow, the next year, or even the next decade. But sooner or later, there may be financial problems in these institutions. For instance, they had mismanaged their balance sheet and overstated how much they owned of an asset, which people are suddenly demanding.
It’s essentially a run on the bank, where depositors try to withdraw their holdings but the CEX has no means of repaying them. In the traditional banking world, Western governments have somewhat nipped this risk in the bud by insuring deposits up to about $100k. So you won’t lose funds due to bank insolvency, no matter how incompetent they are.
For the time being, no such protections exist for CEX. But they do have to comply with legal requirements. So, for instance, if the authorities in a CEX’s jurisdiction decide to freeze your account for whatever arbitrary reason (for instance if the country you were born in is suddenly on a shit list, or they disagree with your posts on social media, etc), you might not have any ability to get your funds.
That’s why in the crypto world there’s a saying: Not your keys, not your Crypto.
What are “my keys”?
As a digital platform cryptocurrency has a difficult problem to overcome. On the one hand, it needs to be accessible enough that none techy people can use it, while also not relying on the authority of established systems, like email to allow for the creation of identity.
An elegant solution that was invented to work as both a password and a private username was that of a “seed phrase”. On Cardano, this is a string of 15-24 pseudo-random words that works like a key to grant access to a wallet that can store your ADA.
The seed phrases tend to read like a bad haiku, and they’ll look something like this “witch collapse practice feed shame open despair creek road again ice least”. It’s a nonsense phrase that allows you to gain control of the associated wallet. Whosoever controls the seed phrase of a wallet implicitly owns all associated tokens.
Under the hood, the words and their order represent a certain cryptographic value. It might surprise you to learn there are more potential seed phrases than grains of sand in the Sahara. There are 2048 words in the BIP list and they can be put in any random order. Put simply, we’re talking of 2048²⁴ combinations, so your chances of guessing someone’s seed phrase are way below:
3.3735033e-78% or put in more understandable terms, 0.00000000000000000000000000000000000000000000000000000000000000000000000000000034%. No, I didn’t fall asleep on the keyboard, that’s SEVENTY-EIGHT decimal places. That’s winning the lottery while getting struck by five lightning bolts in a row and earning a Nobel prize at the same time levels of unlikelihood.
If you had the computational power and energy necessary to try to attempt this, you’re better off just mining Bitcoin, or any other Proof of Work coin, as the rewards would be far more consistent and profitable doing that. But we’re likely talking about nation-state levels of computational resources, so there’s little to worry about.
At least until quantum computing is invented, and you can try all possible options virtually at the same time, your seed phrase is safe. When quantum computing happens though that has the potential to upend the world as we know it, but that’s a story for another day.
For the foreseeable future, the main threat to the funds in your crypto wallet is yourself. You are your worst enemy.
With that in mind, in order to get started, you need to download a light wallet like Yoroi (ALWAYS make sure you’re downloading from an official site and that it’s not a fake program trying to steal your crypto by pretending it’s something it’s not) and follow the wallet creation process from there.
It’s pretty straightforward, but eventually, while setting up a new wallet it’ll flash your seed phrase. WRITE IT DOWN CAREFULLY AND LEGIBLY.
You only get access to this string of words when you create the wallet, and never again. You also don’t get the option to choose them yourself, as humans have inherent biases. For instance, you would likely not pick words at random but a grammatically correct sentence.
So just because of that, the vast majority of options can easily be discarded. Language is not random, it follows clear patterns and has words that are more common than others. Then, you specifically are bound to have certain unique biases, such as possibly liking a quote in your favourite book. This opens the door for custom attacks.
Due to all this, seed phrases are comprised of randomly decided words. I cannot stress this enough though, write your seed phrase down and create duplicates of this list.
Ideally, you should store these duplicates in different locations, where you know they won’t get stolen. This will help recover your funds in case you forget your seed phrase, or lose the original paper you wrote it in for any number of reasons, like floods, fires, earthquakes, etc.
Some people even go as far as carving their seed phrase into rust-proof metals. The level of paranoia involved is completely up to you.
Just remember, in self-custody, it’s not some criminal or virus that is your biggest threat – it’s you!
Your own worst enemy
I can’t stress enough how self-custody means that you are responsible for everything that happens. It’s the ultimate form of accountability.
With a CEX you can forget your password, forget your email, and as long as you’re polite to the people in customer support, you’ll eventually regain access to your funds. There is no recourse with self-custody.
If you make a large enough mistake, you can lose it all.
This is why you should keep your security protocols idiot-proof. Don’t try to roleplay like you’re in the Da Vinci Code with riddles, cyphers, etc. for your seed phrase. You’re likely to forget the answers, and lock yourself out much sooner than you’ll lock out an enemy.
Over the years, there have been horror stories of people losing fortunes by trying to be too smart. For instance, they might write out their seed phrase in a foreign language like Chinese, only to then realize that there are synonyms for the words in their seed phrase, or there are words that are written the same way but mean very different things, so Google doesn’t know which one is appropriate to use when translating.
Keep it simple, have backups that are in different places and be paranoid of people online. Don’t click links or open PDFs, or execute any programs on computers that you use with crypto
It’s also worth mentioning that all this spy nonsense is worthless if someone comes at you with a gun or straps you to a chair and starts beating you with a wrench. Perhaps the best defence against being targeted is simply to have some discretion.
Don’t go yelling around that you have crypto, and certainly don’t engage in conspicuous consumption. The absolute worst thing that you can do is to get a Lamborghini with a crypto logo painted on it. That’s just a not so subtle “rob me” sign.
Learn the principles of stealth wealth. As in, by all means, enjoy your gains (if you have any at this point), go on nice vacations, and have nice meals, but do it in a subtle way. You should comport yourself in such a way that even your neighbour wouldn’t know whether you’ve won the lottery.
Broadly speaking, nothing I write about in this article is necessary. The vast majority of people who invest in crypto will likely do it via FinTech apps like Robinhood. It’s disingenuous to say that this is not beneficial for them in some way.
Self-custody has its risks and can be scary. I put it off for about half a year before I seriously attempted it. Even now, I’d be a liar if I didn’t acknowledge that it still makes me nervous to a certain extent. But I promise you that as you grow comfortable, the nerves will lessen. You won’t sit there checking the balance of your Yoroi wallet every morning fearing that it might have gotten robbed.
Responsibility is scary, but it’s part of maturing and finding your place in the world. You’ll make mistakes, this much is true. Yet, over time you’ll gain confidence and abilities that you thought were unachievable.
Take control of your financial destiny, support the decentralization of the network, and be rewarded financially for it due to being able to get ahead of the crowd.
The choice is yours!
In an upcoming article, we will be exploring how to structure your ADA wallets so that they’re safe and efficiently structured.
If you’re in the crypto or in the traditional finance industry looking for someone to ghostwrite content for you or consult regarding your content strategy, please do not hesitate to message me. I’m a full-time content producer.
Join the community over at @flantoshi on Twitter.
And if you would like to support this project and help me pay rent, I’ll pass on the tip hat and you can send ADA to:
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