Why Should I Self-Custody?
TLDR:
Centralized finance (CeFi) opens you up to security risks such as losing access to your money and privacy.
Self-custodial finance refers to finance where you have direct control over your assets without the need for an intermediary or third party, and it’s more secure than CeFi and simpler too.
Risks With Centralized Finance:
Using centralized finance means taking on its risks. The centralized intermediary (the bank or custodian that owns and manages your funds on your behalf) can go against you in the following ways:
Wealth confiscation: The centralized intermediary can confiscate your wealth.
Censoring: The centralized intermediary can censor you from using your money.
Mismanaging: The centralized intermediary can confiscate your funds, either by internal incompetence or external exploits.
Lack of privacy: The centralized intermediary knows all the details about your finances and personal identity.
If you believe these risks won’t materialize, read this account of the failures of centralized finance. The materialization of these risks burden society with hundreds of billions in lost or frozen funds every year, and making finance resistant to these risks is one of the biggest problems to solve. Self-custody is a more secure solution to manage finances.
Self-Custody is the Solution:
Self-custodial finance refers to finance where you have direct control over your assets without the need for an intermediary or third party. There are two types of ways you can self-custody: using a physical vault or using a digital vault. When you use a physical vault, you hold physical keys to that vault, and in that vault, you can hold gold and cash. When you use a digital vault, you manage digital private keys to that digital vault, and in the digital vault, you can hold bitcoin, digital dollars, and other digital assets. Your digital vault can help you secure these private keys, so that other people can’t compromise them but you can always access them. This contrasts with centralized finance (CeFi), where banks, financial institutions, and other services control and manage your assets on your behalf. Taking custody of your assets can mitigate many of the risks associated with CeFi, and provides the following advantages:
Security: Self-custody gives you control over your money. You don't have to worry about a third party confiscating your wealth, censoring you, or losing your funds.
Privacy: Third-party custodians inherently have the ability, and often the incentive or legal obligation, to violate your privacy since they are the ones who control your assets and see all activity. ****When you self-custody, it’s a lot easier to access financial privacy.
Interchangeability: Unlike CeFi, if you don’t like your self-custody vault, you can change without permission. This is true when using physical vaults and digital vaults.
Accessibility: Currently, approximately 2 billion people don’t have access to CeFi anyways. If you’re one of those people, self-custody is the only way for you to manage your finances.
Risks With Self-Custody:
Whereas self-custody helps you avoid risks you would have otherwise taken using centralized finance, it also involves taking full control of your assets, which means you must make a careful decision in choosing how and what to self-custody. Nevertheless, if used properly, self-custodial finance is strictly more secure than CeFi.
How Can I Start Using Self-Custody?
At Lava, we’ve built a secure digital vault for individuals who want to take custody into their own hands but don’t want to compromise on security. You can learn more about how to get started with Lava — and even learn about other self-custody options — here: lava.xyz
FAQ:
How do digital vaults and private keys work?
One way to think about digital asset self-custody, digital vaults, and private keys is to conceptualize blockchains as a database that keeps track of who owns what assets. But instead of this database being run by a single person, it’s run by many people who come to consensus about the current state of the database and new changes. This decentralized nature of blockchains makes it so that one person doesn’t need to be trusted to not mess up the database (reverse transactions, print money, etc.) since everyone who runs the database has to agree on changes to it. When you want to make a change to the database, for example by moving your bitcoin, you have to prove to the entire network of people running an instance of the database that you are authorized to make that action. You can only do that if you have access to a piece of information, your private keys.
Contributors:
This article was written by Shehzan Maredia.