Many users are moving away from centralized exchanges and toward self-custody of their cryptocurrency as a result of the recent collapse of the FTX cryptocurrency exchange. Nevertheless, there is still a big risk of human error. This pattern was seen in the failure of several cryptocurrency businesses in 2022, including as Terra, Three Arrows Capital, and Celsius Network, as well as the March 2023 financial crisis.
“Not your keys, not your money” has become a catchphrase in the cryptocurrency community as a result of the FTX crash, which has led to many users taking self-custody of their cryptocurrency. Self-custody, however, comes with its own set of difficulties, such as key management and recovery phrase security.
Hugh Brooks, head of security operations at blockchain security company CertiK, asserts that self-custody poses a higher danger for most users. Many individuals put their wallet recovery phrases in unsafe places and forget or lose them.
Ledger is introducing “Ledger Recover,” a service that divides a recovery phrase into three encrypted shards and delivers them to custodians: Ledger, custody business Coincover, and code escrow company EscrowTech, to address this problem. Similar to this, Trezor provides Shamir Backup, which enables users to divide a recovery phrase into 16 shards and distribute them to reliable individuals or store them in secure places.
However, each individual must also accept responsibility for their actions. Josef Ttek, a Bitcoin expert at Trezor, emphasizes that consumers must be in control if they wish to assert their financial sovereignty. Technical methods to handle recovery phrases are also being developed by software wallets like MetaMask, including a new Ethereum technical standard.
Self-custody is becoming increasingly common, but it is still difficult to strike a balance between security and user experience. More individuals will enter the crypto field if the pain point of managing a recovery phrase is removed, as Ledger CEO and Chairman Pascal Gauthier points out. However, experts advise users to still bear personal responsibility for their cryptocurrency’s security.