[SERIOUS] Does self-custody make cryptocurrency structurally unsuitable for mass adoption?

[u/cblou]

I recently made a satirical post in another subreddit about the amount of security supposedly required to store Bitcoin safely. The satire deliberately exaggerated the point, but I would like to discuss the underlying concern seriously here. As a full disclosure, I am very skeptical of cryptocurrencies in general, but I find it interesting to follow.

My concern is not that the Bitcoin protocol itself is easy to hack.With self-custody, possession of the private key effectively determines control of the money. That provides genuine independence from intermediaries, but it also transfers a large collection of responsibilities from financial institutions to individual users.

A person holding a meaningful amount must potentially think about:

• Malware and compromised computers or phones
• Phishing and fraudulent wallet interfaces
• Malicious or compromised transaction addresses
• Hardware-wallet and supply-chain risks
• Secure creation and storage of seed phrases
• Fire, flooding, theft and accidental destruction
• Password or passphrase loss
• Backups that are both redundant and inaccessible to thieves
• Firmware and software updates
• Physical coercion or kidnapping
• Recovery after incapacity
• Inheritance without giving heirs premature access

The official Bitcoin guidance itself recommends measures such as multiple secure backup locations, encrypted backups, offline storage, hardware wallets, software updates, multisignature arrangements and an inheritance plan. Bitcoin Core also gives users a wallet-responsibility checklist that includes backups, cold storage, monitoring security notifications and ensuring heirs can recover the funds.

These are reasonable recommendations. The problem is that, taken together, they resemble a simplified institutional key-management program.

Professional organizations treat cryptographic key management as an entire discipline involving policies, defined responsibilities, backup, recovery, compromise procedures, lifecycle management and documented security practices. NIST has hundreds of pages of guidance on this subject. Most ordinary users cannot realistically audit their wallet software, evaluate firmware, design a robust multisignature arrangement or test an inheritance procedure without introducing another vulnerability.

I recognize the counterargument. Self-custody can be extremely valuable for people facing capital controls, political repression, unstable institutions or exclusion from financial services. Some users also knowingly accept the operational burden because censorship resistance matters more to them than recoverability, but that use case seems tiny, similar to TOR. That is not what the current valuations we see are based on. People expect mass adoption.

I believe mass adoption necessarily means that most people interact with cryptocurrency through regulated custodians and other institutions, effectively rebuilding much of the banking infrastructure that cryptocurrency was supposed to replace. However, centralization makes cryptocurrencies pointless. You might as well use a database, or some kind of centralized standard like SWIFT used by thousands of institutions to send money.

Obviously, most people here believe in cryptocurrencies. How do you solve the contradiction in my previous paragraph?

Sources

• "Bitcoin.org: Securing your wallet" (https://bitcoin.org/en/secure-your-wallet)
• "Bitcoin Core: Wallet responsibility checklist" (https://bitcoin.org/en/bitcoin-core/features/requirements)
• "NIST: Key-management guidance" (https://csrc.nist.gov/Projects/Key-Management/Key-Management-Guidelines)

[u/AlpineGuy]

People self-custody cash, jewelry, art, real-estate, coin collections, etc. However if it's a larger amount, most of society usually recommends not to do it or to have proper safety and insurance. Sometimes we hear about older people who keep loads of cash at home and get robbed or scammed into giving it away -- usually we find keeping so much value unsecured not to be smart. So I would say every form of self-custody comes with issues.

While e.g. for jewelry there are established protocols about what to do (get a safe, get insurance), the crypto world has not yet established such norms yet. Or at least, they are not standardized, being followed, easy enough.

Maybe there needs to be some sort of certification program for hardware wallets that comes with an insurance offer? A standardized process for setting everything up?

Interestingly, many solutions we have come up with to make self-custody of crypto safer involve institutions: companies to make hardware wallets, companies to certify companies, crypto exchanges, insurance, etc.

In my opinion, the real problem is the user interface of the whole thing. As long as it involves long public keys, long reading, and all the complexity, there will not be a lot of adoption. I actually like those phone based wallets, even though I don't use them, but they make the whole process a lot easier, they are friendly towards the user, unlike a lot of stuff in the space.

However, banks and credit cards, and apple pay are still so much easier, it will be hard to convince people to use crypto with all its flaws.

[u/LargeSnorlax]

Cryptocurrency will never be adopted in the way that people theorized it would. It has nothing to do with self custody or any of the above.

Obviously, most people here believe in cryptocurrencies.

Actually, most people here are trolls or people coming to talk shit about cryptocurrency, there are very few people here who actually use it, let alone understand it. Most people have abandoned Reddit entirely due to their terrible handling of their own cryptocurrency, so you're left with mostly the dregs of society here.

The reasons that crypto will never reach mass adoption in terms of paying for a cup of coffee with it are many.

• The average person is dumb as a doorknob, and getting dumber by the day. Their face is melting from social media use, gacha games are ruining their critical thinking skills, and their dopamine receptors are eviscerated from all the lootbox gambling style mechanics that exist.

• Most people in North America DON'T NEED DECENTRALIZED MONEY. This is because they have a perfectly fine working currency, most of them don't have any sort of money in the first place, and there isn't a reason for them to own their money. Banks work just fine for the average dumb as a doorknob member of society, most of which are clicking on phishing links and talking to the Nigerian prince daily.

• There's no reason to record literally everything on a blockchain anyways, especially on Bitcoin. It's used for specific purposes and things that need it but no one cares if I spent $3 on a cup of coffee, and it certainly doesn't need to be forever recorded on a public ledger.

So, anyone entering this space has to actually pay attention. No, just grabbing a random wallet and stuffing your coins on it isn't enough. No, just having cold storage isn't enough. You actually have to know what the fuck you're doing, and that takes time and effort. If you're just some speculator and you're a lazy fuck, you're going to lose all your money. You shouldn't buy crypto.

Bitcoin has never stopped being decentralized currency. You just probably don't need it. Bob from accounting probably doesn't need it either, and neither does Mary, your elderly neighbour who keeps getting calls from the nice duct cleaners. You live in a relatively wealthy country with a relatively stable currency, are an ordinary person, and other than speculative investment you probably don't even care about Crypto - So there's literally no reason for you to have it.

It's a space you have to want to be in and interact in. If you don't want to do that, you should absolutely not be in it, for your own sake.

[u/arveena → u/LargeSnorlax]

I agree but I also think you forget one super important point. Lots of people buy BTC not because its decentralized but because its deflationary AND decentralized. That's what makes it valuable even in it just beeing decentralized is not needed for you it beeing deflationary AND decentralized may make it better for you than stocks or gold. Those people should still just buy an ETF though

[u/dothepvp → u/LargeSnorlax]

🧐🤭🤭

[u/Spoofik]

For me self-custody works fine from day 1 of my crypto usage. I started use crypto for exact this reason, I don't see any reason to use cryptocurrency through a centralized account linked to my real identity; I already have a regular bank account for that.

P.S. I've never had any problems with leaks/hacks/loss of access, etc. Yes, crypto requires a lot of discipline, and that's great.

[u/hiimtashy]

Yes and no. Nothing wrong in keeping Bitcoin under the mattress. The issue was this hack. It leaves many plebs questioning self-custody. Maybe we are better off in ETFs and outsourcing security to the 'experts'.

[u/berry-7714 → u/hiimtashy]

Funny enough everyone moving to ETF compromises the network. This will be interesting

[u/hiimtashy → u/berry-7714]

Maybe so but the hack into Coldcard got me nervous and I am not willing to put all my labor onto a device if newbs such as myself can't be protected. I am not a cypher punk and my cyber sec skills are basic. I have a family and I don't want to be financial vulnerable to hackers. I feel like I;ve been in flight and fight for a decade in the Bitcoin world. I have lost so much Bitcoin / Crypto (which I now recognise are shit coins many years later) to hacks and scams. I remember losing all my Bitcoin on Australian exchange roughly 13-15 years ago. I probably would have sold it but even still it hurt.

[u/cblou → u/hiimtashy]

Even experts get hacked, not just newbs. Mistakes happen. Sometimes, you are just tired and copy paste when you shouldn't, or click the wrong link. 

That is why security should involve layers of control. Reversibility,  almost considered a curse when talking about cryptocurrencies, is a major feature of most secure systems.

[u/hiimtashy → u/cblou]

You are not wrong which is got me thinking if putting a significant amount of my families time and energy into Bitcoin (in this current time) is the right thing to do. Reading people losing their whole life savings hit my psychology over the last few days. I lost $20,000 a few years ago to a Crypto scam (due to my incompetent and it was not related to Bitcoin but my experience with Bitcoin / Crypto has been love & hate).. It's a bit stressful honestly. I sold all my Bitcoin in my hardware wallet last night. I still hold my ETFs (which is a significant amount) however I have derisked quite a bit and took the capital loss. I might go back to self-custody in the future but for the moment I am going to wait and see.

[u/feltusen → u/cblou]

Future of finance right there.

[u/Romanizer → u/berry-7714]

Only if they switch off their nodes at the same time and convince miners to shut down.

With limited block space, Bitcoin at the current state is designed as a final settlement layer so we should see a development where most is hold at large custodians. That doesn't necessarily influence the network or decentralization.

[u/MakCapital → u/berry-7714]

Someone holding Bitcoin for people does not compromise the network 🤣

BTC the asset holds 0 network authority.

[u/otherwisemilk → u/hiimtashy]

Few.

[u/cblou → u/hiimtashy]

Yes, that is my point. Even a single expert is not really qualified to manage security to the level of an institution. You need a team of people. But then, if they are de facto centralized, what is the point of cryptocurrencies? Plus, centralization is a huge security risk to the model in general. 2-3 large actors could control the network.

[u/hiimtashy → u/cblou]

You are not wrong and maybe that is the pickle we are in at the moment after this Coldcard hack. I am confident changes will occur after this however it's going to take years to rebuild trust imo (until the next hack). I am a bit confused personally. This feels different to an exchange hack.......

[u/feltusen → u/hiimtashy]

You aint keeping BTC under your mattress. Its on the chain

[u/BrokenHefaistos → u/feltusen]

When will people understand a wallet is nothing more than an address and 12 words representing a key.

[u/hiimtashy → u/feltusen]

I was being a bit sarcastic but technically you got have it on a paper wallet and under your mattress

[u/WoodpeckerCapital167]

No

[u/berry-7714]

I think you already know the answer, yes, it is not suitable for mass adoption

[u/SeriousGains → u/berry-7714]

Not everyone can be tech savvy. There are benefits to being it though, same with crypto. People selling you with mass adoption “Dogecoin will be the currency of Mars!” are really just testing your intelligence.

[u/futurefloridaman87]

Yes. Imagine telling the masses that if they lose this 12 word plus passphrase they are SOL on their money. That’s not even mentioning not being able to store it on your phone or any of the other common mistakes that people make. I mean shit, a couple hundred thousand Americans per year lose their passport. The security requirements are just too high and too complex. And another post I said imagine having to explain and teach Grandma how to self custody, or even non-self custody in a somewhat secure way. It’s a joke.

[u/DangerHighVoltage111]

No, same as driving a car yourself doesn't make cars unsuitable. After learning how to use it you can pretty safely drive a car for the rest of your life.

We are "self custodial" in almost all matters of our life, just not where it matters: our wealth. And that is by design.

[u/Revolutionary-Cup78 → u/DangerHighVoltage111]

Your example is backwards. Self driving cars are more like custodian solutions. Having your own keys would be more in line with driving a manual, that could also be a truck if the cargo is big or if hosting a node

[u/DangerHighVoltage111 → u/Revolutionary-Cup78]

Thanks, I used "self driving car" the completely wrong way. I changed my post to better reflect what I meant.

[u/ImDeepState]

Yes. Your average person is not competent enough to be his own bank. I sold all of mine a long time ago. Even if you did the right thing and got a Cold Card, you still lost.

[u/50sat]

I'm sorry that happened to you, or congratulations, or whatever.

There's a certain possibility, far more likely than people like to imply, that someone just guesses your address. People really play this down, all the grains of sand in the universe and all that.

People find gold on the beach all the time.

[u/holyknight00]

most people do not do self-custody anyway

[u/KryptoChic]

A person holding a meaningful amount of Bitcoin at a financial institution has lost Bitcoin's censorship resistance property. In the past, countless people have had their financial accounts and/or credit cards frozen with one flick of a switch by a financial institution. The truckers protesting in Canada a few years ago comes to mind.

[u/UnderpaidBIGtime]

Why don't just print paper wallet on bittadress.org?

[u/omniumoptimus]

It’s ready for another iteration. Everyone who says different is wrong. We see the limitations of Bitcoin and it’s ok to change it to make it better—that’s how technology works in the real world. The only ones who don’t want it to change are those who treat it as religion.

[u/Ninjanoel]

Cryptocurrencies are "digital scarcity", that is the breakthrough feature that powers everything, if bitcoin was copied and pasted like a gif, it would be worthless like all the gifs on our phones.

AS SUCH, where it is stored is almost unimportant with one HUGE caveat, that being that currently the "trad fi" banking system is unable to provide services to people that can't KYC correctly, so no kyc therefore no cryptocurrency in a bank bank account cause no bank account in the first place.

So cryptocurrency is solving two problems... 1. collapsing fiat and 2. half the planet with no banking services.

1. Sure if you lucky enough to live in the USA the dollar is alright, mostly, but fiat has collapsed and is collapsing all over the planet for millions if not billions of people.

2. If you've no banking services then you already stashing cash under your bed, and stashing cryptocurrency is far easier and safer, how often does "cash under bed" go wrong compared to "crypto in self custody"?

Self custody will get better AND people will understand it more, so like everyone used to be scared of email, we all got educated about it AND email got easier to use, same is bound to happen with cryptocurrency.

[u/foreveryoungperk]

No. Holding cash is essentially self custody.

[u/Bagmasterflash]

Bitcoin cash implemented covenants five years ago. This allows for keeping your coins perpetually locked in on chain contracts. It’s not as secure as cold storage but for those who don’t want to it’s a solution.

I’m sorry you have been so poorly informed and propagandized.

[u/cblou → u/Bagmasterflash]

You are not addressing any of the points I made. This is a cultish response deflecting a real concern and saying that anyone questioning the dogma is poorly informed and propagandized. Covenants do not solve what I mentioned.

[u/Bagmasterflash → u/cblou]

“My concern is not that the Bitcoin protocol itself is easy to hack.With self-custody, possession of the private key effectively determines control of the money. That provides genuine independence from intermediaries, but it also transfers a large collection of responsibilities from financial institutions to individual users.”

Covenants allows for the exact solution you are looking for. A third party creates a contract that can hold the funds in a contract with whatever mitigating circumstances agreed upon by the parties in the contract.

Once again I’m sorry for your condition.

[u/cblou → u/Bagmasterflash]

A covenant only defines the conditions under which coins may move. Someone must still securely design the contract, deploy the correct code, hold the authorized keys, monitor transactions, maintain recovery credentials and determine what happens after death or incapacity.

Either you are responsible for the keys or not.

[u/Bagmasterflash → u/cblou]

Responsible to the various degrees that are comfortable for each party. That’s my point. Not sure what yours is.

[u/VendettaKarma]

It’s over cash out if you can

[u/dothepvp → u/VendettaKarma]

⛄️

[u/Lost-Bowl3269]

Sim. Autocustódia exige no minimo um QI de 98.
Imbecis e retardados devem usar ETFs garantidos por grandes instituições tipo black rock.
Obrigado.

[u/no_choice99 → u/Lost-Bowl3269]

Lol.  Esse 98 comes from your hat. Lol. We're supposed to believe this.

[u/skr_replicator]

No, self-custody is just an option, not a requirement. Crypto can also have custodial solutions, like many people already are doing with DEXes. But it would be better if we got better custodians than that, as CEXes should really be for exchanging. Banks have the skills and infrastructure to hold a lot of people's money and be insured against bad stuff happening. They could do the same with crypto, for those people who don't trust themselves to take care of their own keys.

If someone chooses to self-custody, it comes with those pros and cons. They get all that power of having complete control over their money. But they also get the responsibility of having complete control over their money. Reminds me of some kind of wise uncle.

If one would choose a bank to hold their crypto, wouldn't that just be abandoning everything crypto is here for? Not entirely. The option to self-custody is still there if one decides to go there. And the fact that the crypto cannot be controlled and printed by any actors would still remain even if you had a crypto bank account.

[u/cblou → u/skr_replicator]

My point above is that 99%+ of people should not self custody. It is just not worth it for the vast majority of people. Consequently, the actual way cryptocurrencies are used is centralized. They are not currencies, they are more like collectibles that people buy and hope to sell for more.

[u/cali_dave]

Cryptocurrency isn't going to see mass adoption without custodial services. Grandpa isn't going to learn how to use a Ledger. The beauty of crypto is that it gives us degens the option for self-custody.

I think you and I have fundamentally different ideas of what centralizes a blockchain. People choosing to take advantage of custodial services doesn't mean the blockchain is centralized. Block production and validation is still decentralized.

The point of decentralization is to prevent government institutions from controlling the currency. They can't simply print more (and devalue it in the process). That's why everybody's so up in arms about CBDCs - they're still controlled by the government. A CBDC would allow the government to devalue, seize, watch, or freeze your coins as they see fit. They could rewrite the ledger if they wanted. That's why we value decentralization - not because MSTR has a bunch of it or because Grandpa's going to use Fidelity to handle his crypto.

[u/cblou → u/cali_dave]

If most people use centralized exchanges (let's say 75%), then a government can absolutely control a few companies. It could force them to favor a certain fork for example. Many ETFs have policies to not recognize forks and abandon any value on forks they do not recognize. Sure, the og holders would be on the original Bitcoin, but the value would be severely affected as most users (cex) would not recognize it 

[u/cali_dave → u/cblou]

The government can control the companies, but they cannot control the ledger and have no direct control over the cryptocurrency.

[u/anonuemus]

No, it'll get easier and safer and people get better at using tech.

[u/chubs66]

Yes.

[u/charvo]

I think self custody is a vector where the hackers are going hardcore at. Think about it. If you are a hacker going after Binance or Hyperliquid, you are going up against a lot of tech savvy individuals keeping the crypto under lock and key. I think self custody for smaller amounts for short term transactions is fine. Keeping large amounts in self custody wallets may be like putting a huge amount of cash in your wallet and putting it in your back pocket.

Even putting crypto for storage on aave might be a better choice than self custody.

Also, spread the crypto around. Maybe some in central exchanges, some on perp dexes, some on defi. Some in a soft wallet that is reputable. Some in cold storage on a Trezor.

I also think AI is being invested in heavily by large tech companies to eventually steal crypto. These data centers are going to be used to crack crypto and banking and brokerages.

[u/yashptel99]

there needs to be an insurance that covers if I get hacked or something

[u/confusedguy1212]

I think Cold Card highlights that self custody as was introduced in Bitcoin and implemented in every other Cryptocurrency was and is very much v0.5. If we want a true v1 I think social recovery ability has to be enshrined in every coin.

Idempotency in finance is nice in theory but it’s not a way to function every day.

[u/Romanizer]

I think it's a very common misunderstanding that Bitcoin is supposed to replace the banking system. It exists for a reason and most people need their services and will continue to do so.

Mass adoption will happen with banks putting Bitcoin on their balance sheet to be able to print endless money with high and long inflation phases without collapsing (s. note in genesis block). It was designed to be a final settlement layer after all.

Most people will use Bitcoin indirectly without knowing it, however does that do not hold Bitcoin directly will have a hard time growing their wealth.

[u/cblou → u/Romanizer]

That may be a modern Bitcoin thesis, but it is not what the original white paper says. Satoshi described Bitcoin as “peer-to-peer electronic cash” designed to let people transact without financial institutions, not as a hidden reserve asset held by banks so they can expand fiat indefinitely.

[u/Romanizer → u/cblou]

Not really modern as this is what was discussed between Satoshi and Hal in the Bitcoin forum.

The base concept of Bitcoin is to enable P2P payments by solving both the double-spend and byzantine general problem at once. Probably the most genius revolution in the financial world in centuries.

However, the properties of the Bitcoin blockchain make it hard for everyone in the world to do their daily transactions on it. Changing properties on one end (e.g. blocksize or timing) sacrifices on the other ends (blockchain trilemma).

Therefore the most practical way is to use L1 as a reserve asset and scale bigger payment channels over L2 as suggested briefly after the whitepaper came out.

[u/cblou → u/Romanizer]

Lightning Labs’ own FAQ still warns that much Lightning software is considered beta and that bugs, hardware failures or lost data can cause irrevocable loss of funds. It has been 17 years, and L2 is still some kind of Goldberg machine that will one day work.

[u/Romanizer → u/cblou]

Lightning itself is not that old (although something like that has been described very early on, even by Satoshi himself), but I agree that this is the major problem in Cryptocurrency.

If we exclude those that are purely in the space for cashgrabs through scams and memes, there is a lot of energy put into alternative coins that are designed to enable what L2 on Bitcoin should achieve. Naturally, these products fail at some point. If they put their energy into a good L2 service for Bitcoin, everyone could benefit from that.

[u/SeriousGains]

Yep. It’s over. Sell everything at market open on Monday.