As the cryptocurrency industry matures, institutional players enter the space and the number of competing storage solutions rise, the idea of custody has had to evolve significantly. Yet this evolution did not come easy. From exchange hacks and private key catastrophes resulting in millions lost to archaic wallet experiences, the demand for a better solution was inevitable. While today there is an abundance of options, quality has not always kept up with quantity. This was the inspiration behind the Jwallet, which combines maximum security with a superb user experience, along with other solutions, which have come quite a long way since the early days.
The Early Days
Despite the increasing complexity of wallets, the original has remained intact. Bitcoin Core, then Bitcoin-QT, is still worked on by Core developers and allows users to transact their BTC and sign messages. It is also a full node wallet, meaning that it downloads the entire blockchain history. As a result of its lengthy development, ability to verify/relay transactions and additional privacy benefits, it remains a popular choice for BTC holders.
A popular early alternative to this full node wallet was the simple paper wallet which, as the name indicates, is simply where the private key is written down and stored by the user. This ensures that the private key is safe from internet-based attacks, but assumes:
- The PC is not infected at the time of private key generation
- The user does not lose the key or the paper doesn’t get damaged
- The user doesn’t want to access the funds regularly
New wallet creation was initially slow, owing to the lack of general awareness around the fledgling network. However, 2011 saw the launch of wallets such as MultiBit, Electrum and Blockchain.info.
MultiBit and Electrum launched as lightweight desktop wallets, enabling users to send and receive BTC without needing to download and sync the entire blockchain first. Blockchain.info could be used through a web browser and subsequently as an Android/iOS app in early 2012.
While these wallets enabled users to take charge of safely storing their own assets, they proved hard to use. Many lost access to their funds forever due to negligence, theft or sheer bad luck. This has led to a desire from users to offload this responsibility to other firms.
The Rise of Third-Party Custodians
At the same time as users wanted to have others store their assets, some of the first exchanges launched. Users took advantage of these early custodians, depositing vast amounts of BTC into them, which would later prove to be disastrous. Exchanges lost funds from the start, with 1m+ BTC lost in exchange deposits from 2012–14. This was culminated in the infamous Mt. Gox hack which saw 850,000 BTC stolen from the site, some $0.5bn at the time and $3bn today. The pace of these exchange failures hasn’t dropped since, with the Canadian exchange QuadrigaCX announcing just recently that they had “lost” nearly $200m of user funds.
Due to a lack of transparency and confidence in how exchanges were storing their cryptoassets, many large holders began to look for alternative means to offload their custodial risk. This included Wences Casares, who was looking for a secure means to store his BTC after buying in 2011, which eventually inspired him to launch Xapo. Xapo offered a publicly available custody solution, provided through a series of heavily secured sites including a mountainside bunker. Third party custody solutions such as these aimed to adhere to sufficient standards so as to allow institutional investors to be able to invest in crypto.
Institutional investors and the firms that buy assets on their behalf are not allowed, by law, to handle assets in the manner a regular user would. This is to safeguard investor holdings from theft, fraud, etc. Instead, custodians have to hold assets on the behalf of investors. In addition to Xapo, the likes of Coinbase Custody, Gemini and BitGo have emerged. The rise in importance of crypto as an asset class has also led to leading financial institutions such as Fidelity, which has over $7.2 trillion in client assets under their administration, to launch custodial solutions.
Expanding Options for the Retail Investor
The rise in third-party custodians has been matched by an expansion in self-custodial solutions in recent years. There were two important developments which combined to make self-storage a more viable and less intimidating endeavor.
Multi-Asset Wallets
The increase in the number of cryptoassets available to investors meant a sharp increase in the amount of wallets users had to use. This led to the rise of wallets which were able to handle multiple assets through one interface, negating the need to store a multitude of private keys and passwords. With many projects opting to launch as ERC-20 tokens on top of the Ethereum network, wallets had to expand to include a means to manage these tokens.
Hardware Wallets
The first hardware wallets launched in 2014, with the introduction of offerings from Hardbit and Trezor. These hardware wallets made cold storage easy for the average user for the first time. They also solved some of the issues with prior offline storage, by enabling users to use their hardware wallet safely on an infected PC, an ever-present risk with the likes of paper wallets. Although originally intended as Bitcoin only wallets, they matched the wider industry change and quickly supported a wide range of other cryptoassets.
A Continuing Evolution
As wallets continue to change, what constitutes a wallet will continue to expand. The wallet of the future will have to handle many more tasks and use cases than ever before. From cold and hot storage function now being featured on watches to wallets being natively integrated with phones to future of custody looks quite promising.
The Jwallet is the easiest, fastest, and most secure mobile crypto wallet for Ethereum & ERC20 tokens. Download on iOS | Download on Android
