Wallets, Storage and Custody (oh my!) - Valkyrie

Sean Rooney discusses wallets and storage in the latest Lightbulb Series episode. “As crypto continues to grow into an industry of macroeconomic and social significance, mainstream adoption is attracting new users all the time. The types of users in the space range from individuals, to investment firms, to hedge funds, and even nation-states,” he states.

Rooney goes on to explain that, “An important issue that these entities must decide on is which wallets and what type of strategies for custody they want to apply to digital assets. Regardless of whether we are talking Bitcoin, Ethereum, or an NFT, the information to owning a digital asset is on a ledger.”

We have to ask the question, “How do we interact on the blockchain at a verifiable level and in a secure way?” The answer is with a wallet.

Rooney explains that Digital wallets are used to send and receive crypto assets, which is analogous to a physical wallet. However, instead of storing physical currency, the wallets store the cryptographic information used to access the assets that are stored in the wallet. As the industry has evolved so has wallet technology, however, there are a couple of basic types of wallets with key differences. There are two common types of wallets: hot wallets and cold wallets. A hot wallet connects to devices that use the internet, like a computer or mobile phone. The main feature of hot wallets is that they are convenient and easily accessible. However, being connected to the internet could create vulnerabilities because these wallets create private keys and store them on these internet-connected devices.

“While a hot wallet can be very convenient, there's also the potential for a lack of security. Just like most people wouldn't carry all of the money they own on their person, it might not be a great idea to store all or large amounts of crypto on a mobile phone,” Rooney explains.

On the other hand, there are also cold wallets. The simplest description of a cold wallet is one that is not connected to the internet. They could stand a lesser risk of being compromised. Many people prefer to look at a hot wallet as being for spending, perhaps on-the-go with a mobile phone. While a cold wallet should be more appropriately compared to a wallet for savings.

Rooney goes on to discuss custody of digital assets that are stored in the after-mentioned wallets and private keys. “Crypto can be used by anyone from single users all over the world, to large institutions. If you control the private keys, it is possible to control the asset. Those private keys are protected.”

What are the options for custody? When exchanges are used to store crypto, the exchange is in control of the private keys and must sign off on a transaction to go through once requested by the user. If using an exchange as a custodian, it is imperative to utilize the security features available such as 2 Factor Authentication and address white listing if possible. Another option would be self custody (in other words, withdrawing digital assets from an exchange). This could be in several forms such as a hardware wallet, paper wallet, or your own cold storage system.

This option is a little bit more technical and makes private management all the more important. Using a hardware wallet, the method of having a secure backup plan to protect the keys in case of an emergency is absolutely crucial.

Rooney shares that there are alternatives to these wallets, some of which are available as a service. “Multi-party complication or a multi signature wallet is where multiple signers are required to sign off on a transaction or we're the private keys are potentially split up among multiple parties or devices. There are lots of products available and more to come such as trust and funds. Ultimately it is up to every investor to decide on the option they are most comfortable with.”

The Lightbulb Series covers crypto topics in 5 minutes or less. If you have a question you want covered, reach out to us on social media or via email at [email protected]

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