We’re very used to leaving things in the custody of others.
Custody refers to the protective care or guardianship of something. We routinely leave assets in the custody of banks, investment managers, and exchanges.
In the early days, banks held exclusively physical cash and were places you could leave your money and valuables and feel confident they were protected. Banks had vaults, whereas you had pillows and floorboards.
The self-custody version of a bank vault is a home safe: you give up much of the security of the bank but have complete control over the assets you’ve stored in it. And not only does that mean you have control over them—it also means nobody else does. But, the responsibility to protect those assets is entirely yours.
As most modern financial activity—including banking—has gone digital, it’s second nature to think about assets as existing electronically: as a matter of fact, just 8% of all the money on Earth exists physically.
The other 92% is non-physical: when you receive a paycheck, pay for your Netflix subscription, or buy a medieval goblet off Amazon, those transactions are happening digitally without any physical cash changing hands.
While it’s natural to think about banks as the places where we store our money and assets given our historical reliance on them, the physical and digital worlds are entirely different.
There are drawbacks to relying on a bank or a crypto exchange for custody of your assets. For example, you must always authenticate yourself to your bank before they’ll let you access your accounts. This is normally a good thing, until an unusual transaction (like buying a medieval goblet) appears suspicious to the custodian, who may then lock your accounts. Or, a financial crash happens and your custodian places limits on the sale of stock from your accounts, or worse, a market crash forces your bank into bankruptcy which prevents you from withdrawing your money.
What this all reveals is that there is an intermediary who actually controls your assets, and they are the ones who give you permission to access them … and can take that permission away.
This is one of the critical differences with cryptocurrency: you can be the custodian of your own digital assets, which is where the term “self-custody” comes from.
But how is that possible?
After all, there must be someone who is holding your digital assets. You don’t run a server or database to keep track of digital assets … the things banks and governments do?
Well, actually you do. Or, you could. This was the central technical insight behind the first cryptocurrencies. Cryptocurrency networks are actually open and shared global networks: they aren’t owned by any one group, company, team, person or government. You don’t need permission to join or access them. They’re run by collections of people not entirely unlike you, who run software on their computers so they can serve as nodes on the network. Each node synchronizes with the rest of the network and contains its own independent copy of the network data. This secures the network overall through decentralization: if the network is running on three thousand nodes, it’s nearly impossible to compromise enough of them at the same time to harm the network overall; it would be a bit like trying to catch a school of fish in a small net.
This network is what stands in for a bank, or another custodian. Your digital assets live on it, and as we learned in the last lesson, your digital identity is what authenticates you to the network through your possession of secret information: your private cryptographic keys, held safely in your crypto wallet.
Crypto wallets like MetaMask are called self-custodial for this reason: You are the custodian and the only one who can access your private keys. There is no other custodian required to give you permission to control your assets, so there is nobody who can prevent you from interacting with them. The network is always on and available to you. But as is the case with a home safe, you are responsible for security—keeping your private keys and Secret Recovery Phrase safe.
The advent of self-custody has introduced an era of true digital ownership, something we’ll look at in the next lesson. so don't forget to follow us for more content.
