A short while ago we covered the importance of self-custody as one of the key tenets of cryptocurrency. In that article we touched on the subject of wallets and in this one we dive deeper into the topic.
A wallet for crypto is similar in some regards to a bank account or PayPal account, however instead of being controlled by a central entity it’s controlled by each individual. You don’t need any credit checks or proof of identity to create a wallet which is why they’re so revolutionary.
Many people throughout the world are unbanked because they can’t pass the credit check required to open a bank account. This leaves them vulnerable to financial exploitation and predatory lending. One of the driving forces behind many innovators in the space is the wish to reverse this situation through access to wallets that allow self-custody of digital assets.
A key factor to bear in mind about wallets is that many of them are limited to certain blockchains. Although you can store assets from multiple chains within one wallet, many of them are designed to work with one chain by default.
MetaMask for instance is designed to work with Ethereum by default and is the recommended wallet for our soon to be released MVP. Although you can store assets from multiple chains within one Metamask wallet this takes some additional technical knowledge. For this reason it’s often best to use a wallet that’s designed by default for the chain you’re predominantly interacting with.
A critical aspect to know when setting up a wallet is that the seed phrase is the key to your crypto. During the initial stages of creating a wallet each user is given a seed phrase, which is a series of words that act as the unique key to unlock your wallet. It’s important to keep these safe and never to share them with anyone.
The seed phrase is different to the password for your wallet. It acts as an encryption key that unlocks the entire wallet and allows you to restore a wallet and reset the password for it. This means that if you ever lose access to the computer you use to manage your wallet you can always recover it to a new computer simply by using the seed phrase.
A common saying is, ‘not your keys, not your crypto’, which indicates the importance of keeping your seed phrase secret. Just as you can use your seed phrase to recover your wallet, anyone with it can also do the same and drain your wallet of all its funds.
The risks involved in managing crypto often act as a barrier to entry for self-custody. Many people instead choose to keep their tokens on an exchange such as Binance or Coinbase because they feel safer trusting the exchange.
One major drawback of doing this is that the exchange has the private keys to the wallet your crypto is stored in. As we saw with FTX, this means that unscrupulous exchanges can steal their clients tokens to gamble or embezzle them.
Moreover there are many parts of the crypto ecosystem that people can only interact with if they have their own wallets. For instance, you can’t mint an NFT or stake your crypto directly to earn yield and rewards without your own wallet.
Some exchanges such as Coinbase now offer staking options where you can earn yield by holding certain tokens on the exchange, however this may change in the near future depending on the whims of regulators. Additionally you’ll find that the yield you earn on an exchange is lower than the yield you would earn by staking directly from your own wallet.
For anyone who’s serious about being in crypto for the long-haul, we feel it’s essential to learn how to use and manage a wallet. It allows individuals to take full control over their crypto, and gives a tremendous sense of freedom.
The additional power of being able to directly manage your own assets also comes with the responsibility of learning how to secure them. There are a few technical barriers to entry, but we feel these are a small price to pay for the incredible benefits wallets offer.
For anyone unfamiliar with MetaMask, this link to their FAQs should provide you with more details on the most commonly asked questions: https://metamask.io/faqs/