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- 1 Crypto custody has emerged as a significant service for individuals as well as institutional asset holders.
- 2 With this mechanism, users can ensure the foolproof security of their tokens.
As the name suggests, crypto custody is a storage solution for digital assets. But cryptocurrencies are safely nestled in blockchain-based wallets. The decentralized ledger hasn’t been able to fully secure the assets. There are numerous instances of cryptos getting stolen out of wallets.
Thus, developers built crypto custody solutions that took security one step ahead.
Crypto Custody
Custody takes place when one hands over their belongings to somebody else for protection. The same thing occurs in this context. Typically, custodians are third-party entities that secure assets for their clients.
It could be anything from cash to precious metals, valuable documents, or virtual assets. In traditional banking, these people or things have played a significant role since the 1960s.
However, in the case of cryptocurrency custody, things are different. The custodians of digital assets don’t have to safeguard the assets because they technically can’t. The assets are already stashed through the public ledger called the blockchain. Hence, the custodians guard the network’s private keys that provide access to the assets. Due to the rising adoption of blockchain, crypto custodians are gaining attention.
Notably, a great number of institutional investors stay away from crypto due to security concerns. They deal with established means like fiat money, securities and trust banks, and other centralized institutions for security.
Even so, the demand for crypto is rising and mainstream players are willing to dabble with it. They can do it confidently only when the security mechanism is assured. Notably, the usage of crypto custody is already on the rise.
Between 2019 and 2022, its market cap rose from $32 Billion to $223 Billion. But before embracing the technology, it’s important to know its functionality.
Here’s How Crypto Custody Works
As mentioned above, it’s about securing the private keys rather than the assets. In traditional finance, all custodians are third-party institutes. On the other hand, the crypto space extends the scenario of custodianship. Here, the holders can also become their custodians. At the same time, they can choose a third party to do it as well. Therefore, there are two types of crypto custodians in the sphere.
Self-Custody
Digital asset holders can become the holders of their assets themselves. This refers to easy access with better security. Nevertheless, the greater convenience comes with greater risks too as the holder is the keeper of a physical device and the private key. In case they lose both, the crypto they own is lost too.
Third-Party Custody
The other option is choosing a third-party custodian who’ll guarantee the safekeeping of the assets. These are registered entities that work only after acquiring a license to act as a custodian. For obvious reasons, they deploy more cutting-edge solutions to safeguard the private key.
Future of Crypto Custody
As crypto grows, the need for a robust storage mechanism rises as well. Especially, for its institutional use, it is inevitable. Hence, custody crypto is certainly going to see more adoption in the future. With its adoption, the industries will be equipped to secure their digital assets. They would be able to keep the security concerns at bay easily. All in all, it would benefit the industry.
Steve Anderson is an Australian crypto enthusiast. He is a specialist in management and trading for over 5 years. Steve has worked as a crypto trader, he loves learning about decentralisation, understanding the true potential of the blockchain.
