How does crypto self-custody offer better protection for your digital assets?

The crypto industry has recently experienced instability and significant events, such as the collapse of an algorithmic stablecoin, a protocol, and one of the largest exchanges. In addition, the failure of the leading crypto exchange FTX also negatively affected user sentiment.

Unfortunately, this has given supporters of traditional finance yet another opportunity to claim that the crypto industry is failing. Interestingly, there were 467 cases where people declared Bitcoin dead.

Crypto believers have always propagated decentralized finance as the way forward for community advancement. However, it is important to note that incidents similar to FTX occur due to mismanagement of customer funds and the inability to run a fintech business with impeccable SOPs and good corporate governance.

In fact, Satoshi Nakomoto launched Bitcoin in 2008 to remove middlemen from finance and thus protect users from the mismanagement and business practices of middlemen. This is not a failure of the blockchain industry or decentralized finance, but the result of an unregulated centralized exchange that mismanages users’ assets, a case beyond imagination.

The FTX incident highlighted the need for a more secure and reliable financial infrastructure in the industry. We can use this as an opportunity to build a foundation for innovation and a better future.

Let’s take a look at some of the initiatives that can be taken to protect user assets and prevent FTX-like incidents:

Not your keys, not your coins
When you store your money in a safe in your home, you usually lock the safe and keep the keys in a safe place. Similarly, the concept of ‘Not Your Keys, Not Your Coins’ means that users should always be in control of their private keys in order to maintain control of their cryptocurrency.

It emphasizes the importance of keeping cryptocurrency in wallets or accounts where you are the only one with access to the private keys. This helps ensure that you remain the sole owner of your cryptocurrency and are also not dependent on any third party.

Store your crypto assets in a secure environment (like a digital wallet) and keep your private keys safe. You control your assets and are responsible for their protection.

When you store your digital assets on a centralized exchange or with a custodian, it works like a shared custody where the exchange holds the keys to the coins you own. In a comfortable situation, you can withdraw your coins to any wallet address and transfer your funds. However, in a situation where your centralized exchange is in financial disarray and files for bankruptcy, you lose custody of your assets.

The most secure way to store your digital assets is to store them in a wallet under your control, with keys known only to you. This way of storing digital assets is known as self-custody, and as long as you don’t share your private keys with anyone, your assets are safe and under your control. In addition, blockchain provides a highly secure storage for your digital assets that is impossible to hack.

Local, regulated, licensed and compliant
It is important to choose exchange and custody services after due diligence. Since crypto is unregulated in some countries, user funds have no consumer protection. Custodial service providers should be regulated and must be licensed by the regulator to provide virtual asset services.

Some prominent exchanges regularly publish evidence of reserves to ensure transparency with their users and maintain the confidence of the investing community. Releasing such sensitive data in the public domain is part of ongoing efforts to create an environment of trust within the crypto industry.

Although self-custody is the highest form of security, you can offer your digital assets. Using licensed custodial services is a very practical option for storing your digital assets.

DeFi is the way forward
Real crypto builders are hard at work on a decentralized future of finance that puts power in the hands of the people. The so-called centralized crypto banks recently filed for bankruptcy and were managed as unregulated banks.

These centralized crypto banks locked users’ digital assets in order to offer a percentage return and lend locked user funds to institutional borrowers. The interest collected from the borrowers is distributed among the beneficiaries.

Since these entities were not regulated like traditional banks, trading practices were not transparent and did not follow any standard operating procedures. The long crypto winter disrupted the homeostasis of such unregulated centralized crypto banks resulting in the complete loss of user funds.

Defi platforms also offer yield products where loans must be over-collateralized and all position and liquidation rules are transparent. In case the borrower faces liquidation, he/she cannot mix with the operator to continue operating under the collateralized loan.

We have seen time and time again, in the case of margin calls, so-called centralized landing products had to pay their Defi credits first compared to their positions on other centralized landers. Defi protocols still work successfully because they offer a transparent overview of positions without involving any third party to hold the user’s funds.

However, there are still risks associated with the security of smart contracts and other forms of financial attacks. Therefore, choose the Defi platform carefully.

Digital asset insurance
Insurance coverage and custody of assets are two different things. Asset insurance providers like Nexus Mutual, Canopius, Munich Re, Zurich Arch etc. are now taking crypto risks to insure various crypto companies.

For example, insurance company Defi Nexus Mutual approved 9/10 requests for custodial coverage to those who had no CeFi funds for more than 90 days in Hodlnaut (members who had active FTX custodial coverage when payments were first stopped).

The company also mentioned in its newsletter that if payouts are stopped on February 6, 2023 at 22:54 UTC, members who had active FTX custodial coverage when payouts were first stopped can start making claims. Nexus Mutual also settled many claims during the Teraa Luna fiasco and flash loan attack on the box.

In addition, asset custodial companies take responsibility for the safe custody of investors’ assets. But what sets them apart is that they don’t hold the user’s keys. They also help clients insure their assets.

While insurance coverage provides an additional layer of protection to digital assets, it is equally important to ensure the safety of digital assets by using hardware wallets for offline storage of cryptocurrency and tokens, such as Ledger or Trezor, and opting for self-custody to have full control over your keys.

The recent FTX incident highlighted the importance of secure storage of digital assets and the need for a more robust infrastructure. Users should understand the importance of self-custody and storage of digital assets in a secure wallet.

It is also important to use the services of authorized custodians and exchanges and opt for digital asset insurance from reliable insurance providers. All these steps will help protect the user’s assets and prevent cases of mismanagement of the user’s funds.

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