The Crypto Custody Dilemma
Taking full custody of your assets is incredibly empowering and it’s the path that we are moving towards as a society with the advent of Blockchain technologies, but it’s a paradigm shift that many consumers are not prepared for. One of DoWallet’s objectives is to help cross that chasm into this uncharted territory.
As consumers, we have always entrusted intermediaries and custodians with our money, with our records, and with our identities. Entire industries were built around building trust and storing our lives, and, for the most part, these industries have kept their end of the bargain. Many times, that trust has been tested by data breaches, abuses of privacy, exorbitant fees, and several other trespasses. Blockchain has been the response, and Bitcoin its first real-world manifestation — a framework where trust is built into the system and where users can be the true custodians of their assets. The question is, are consumers ready for this, independently of how awesome it sounds?
There are several reasons why banks exist and people trust them as custodians of their money, but I will focus on what I think is the main one — recourse. Recourse means that if I lose my account number, I can call the bank’s customer service and get it back. It means that if someone steals money from my bank account, I can request an investigation, and likely get that money back. At a macro level, it means that even if that bank goes under, there are central bank-mandated reserves, insurance policies, and many other means to get most, if not all, of my money back. Many of our readers’ from emerging markets are probably shaking their heads so let me caveat this by saying that these concepts of recourse are only truly applicable in developed economies with developed banking systems, but I’ll get to that later. Therefore, in a world where recourse is real, putting the entire onus of custody on the consumer can be a heck of a shock.
Being the ultimate custodian of your assets means complete freedom in how you use your assets and retaining a significantly higher part of your assets by not having to pay intermediaries and brokers. On the flip side it is like carrying around a safe with US$10,000 in your pocket at all times. If you are mugged, if it falls out of your pocket, or if you forget the password of the safe there is no one you can turn to. It’s gone forever — the buck stops with you. This is why we are seeing major financial institutions like Fidelity and the NYSE stepping into this arena to provide custodian services for crypto currencies. While I’m super excited about the credibility that these players bring to this space, having a 3rd party custodian for your crypto defeats a big part of the purpose of owning crypto in the first place.
So how do you maximize the benefits of disintermediation while reducing the risk of loss?
Having your digital currency in what we call a ‘client-side’ crypto wallet means that you hold the private keys to your crypto accounts in your browser, your phone (hot wallets), or on a hard drive (cold-storage wallet). Your private keys in conjunction with your public keys are what enable you to transfer funds from one account on the ledger to another. For client side wallets, the user is entirely responsible for the safe-keeping of those private keys. Mobile wallets, like DoWallet, make use of your mobile device’s security features, like biometrics, and encryption to safeguard those keys on your phone. However, if your phone is lost, you need to recover those private keys somehow, and the mechanism by which that is done is called ‘mnemonic phrases’. These are 12 words in a specific order, created in a way that is virtually un-hackable, which you need to write down, memorize, or safely store. Using these mnemonic phrases, you can recover your wallets in any other device. Losing these mnemonic phrases or allowing others to find them (like copy pasting it in an email that gets hacked) means losing your assets. There are hundreds of cases of lost mnemonic phrases which have spurred an industry in phrase recovery — Just Google ‘Mnemonic phrase recovery service’ and you will see dozens of companies advertising their services in exchange for a bounty if they’re able to help. This is an incredible burden to put upon the user’s shoulders, and a burden that most users aren’t ready to take on. Therefore, in order for us to switch to to this new paradigm of asset ownership, we need to help users ‘cross this chasm’ (borrowing Geoffrey Moore’s book title).
Part of DoWallet’s mission is to help users make the transition to a self-custodian life. We aim to build the tools that will bridge the gap between how we use intermediaries today to a more empowered future for consumers. One of our key research areas is around to to do recovery securely and easily without compromising self-custodianship and privacy. We are in the process of filing a few patents on this and hope to share many of these tools in our upcoming releases.
In the meantime, sign up at https://www.dowallet.app to be eligible for early access!