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Self Custody: Part 2

Operational security and the identity layer

4 min readMarch 22, 2022

In 2022, federal authorities recovered $3.6 billion in stolen Bitcoin—the largest financial seizure in US history.

How did they find it? The thieves stored their private keys in cloud storage. Plain text. The blockchain never forgets, and neither did iCloud.

This case captures both sides of self-custody: the assets were stolen because the original owners trusted an exchange (Bitfinex, hacked in 2016). The thieves lost them because they trusted cloud storage. Everyone in this story made custody mistakes.

Part 1 covered what keys are. Part 2 covers how to actually protect them—and what happens when your wallet becomes your identity.

Key Takeaways

  • Operational security matters more than technical understanding. Most losses come from human error, not protocol failures.
  • Your wallet address is becoming a form of identity—with all the opportunities and risks that implies.
  • The custody spectrum runs from full self-custody to full delegation. Most people end up somewhere in between.

Operational Security

Theory is easy. Execution is where people lose money.

The Wallet Structure

Don't put everything in one place. A common setup:

Hot wallet (MetaMask, Phantom)

  • Small amounts for daily use
  • Connected to apps and sites
  • Accepts the risk of compromise

Cold wallet (Ledger, Trezor)

  • Larger holdings
  • Never connects to risky sites
  • Hardware device required to sign

Deep cold storage

  • Long-term holdings
  • Paper or metal backup only
  • Rarely or never accessed

The logic: if your hot wallet gets drained by a malicious contract, you lose spending money—not your savings.

Signing Discipline

Most theft doesn't come from cracked encryption. It comes from users approving transactions they didn't understand.

Before signing anything:

  • Read the transaction details. What contract? What permissions?
  • Verify the site URL. Phishing sites look identical to real ones.
  • Question unexpected requests. Legitimate protocols don't DM you asking to "verify your wallet."
  • Revoke old approvals. Token approvals persist. Sites like Revoke.cash let you audit and remove them.

The Seth Green incident from Part 1? He signed a transaction. That's all it took.

Physical Security

Your mnemonic phrase is a physical security problem, not a digital one.

Do:

  • Write it on paper, store in a safe or deposit box
  • Etch in metal for fire/water resistance
  • Split across multiple locations (advanced)

Don't:

  • Screenshot it
  • Store in cloud services
  • Email it to yourself
  • Type it anywhere except your wallet's official recovery flow

The $3.6B recovery happened because investigators got a warrant for cloud storage. Don't make it that easy—for anyone.

The Identity Layer

Your wallet address is more than a payment endpoint. It's becoming identity infrastructure.

On-Chain History

Every transaction is permanent and public. Your address accumulates a history:

  • Assets held over time
  • Protocols interacted with
  • NFTs owned
  • Governance votes cast

This creates reputation without requiring personal information. DAOs check wallet history before allowing participation. Protocols airdrop tokens based on past behavior. Your address is your resume.

Human-Readable Names

Raw addresses are hostile to humans:

0x47bb4cCA98FC49B971d86c5t26562c86E6284CeD

Domain services fix this:

  • ENS (Ethereum): yourname.eth
  • Bonfida (Solana): yourname.sol
  • Unstoppable Domains: .crypto, .wallet, etc.

These names resolve to addresses, work across many apps, and create consistent identity. Owning yourname.eth is like owning yourname.com in 1995—except it points to your wallet, not a server.

Caveat: Some exchanges still don't support sending directly to ENS names. Always verify before large transfers.

Pseudonymity vs. Anonymity

Self-custody enables pseudonymous participation—activity under a persistent identity that isn't linked to your legal name.

This matters for:

  • Privacy: Financial activity isn't automatically shared with banks, employers, or governments
  • Access: No discrimination based on nationality, credit score, or identity documents
  • Separation: Keep different activities in different wallets with different identities

But pseudonymity isn't anonymity. Sophisticated analysis can often link wallets to identities through exchange deposits, behavioral patterns, or metadata leaks. If privacy is critical, it requires active effort—not just using a wallet without KYC.

The Custody Spectrum

Self-custody vs. custodial isn't binary. It's a spectrum, and most sophisticated users operate at multiple points simultaneously.

Full Self-Custody

  • You control all keys
  • Maximum sovereignty
  • Maximum responsibility
  • Best for: significant holdings, technical users, jurisdictional concerns

Hybrid Approaches

  • Multisig: Multiple keys required to sign (e.g., 2-of-3)
  • Social recovery: Trusted contacts can help recover access
  • Smart contract wallets: Programmable rules for access and recovery

These reduce single-point-of-failure risk while preserving meaningful control.

Custodial Services

  • Exchange or institution holds keys
  • Familiar UX, customer support, insurance
  • Counterparty risk returns
  • Best for: small amounts, frequent trading, users who prioritize convenience

The Practical Reality

Many people use all three:

  • Exchange account for trading and fiat on/off ramps
  • Hot wallet for DeFi and daily transactions
  • Cold storage for long-term holdings

The question isn't "self-custody or not." It's "what level of custody for what purpose."

The Tradeoff Matrix

PriorityFavors Self-CustodyFavors Custodial
Security from exchange failure✓
Security from personal error✓
Privacy✓
Convenience✓
Regulatory clarity✓
Access to DeFi✓
Insurance/recovery options✓

Neither approach dominates. The right choice depends on your situation.

Making the Decision

Self-custody isn't about ideology. It's about threat modeling.

What are you protecting?

  • $500 in ETH? Exchange is probably fine.
  • $50,000 in diversified holdings? Consider cold storage.
  • Life savings in an unstable jurisdiction? Self-custody may be essential.

From whom?

  • Exchange insolvency? Self-custody protects you.
  • Your own mistakes? Custodial services might be safer.
  • Government seizure? Depends on the government and the custody arrangement.
  • Hackers? Both approaches have vulnerabilities—different ones.

The choice depends on what you're protecting and from whom. There's no universal answer, only tradeoffs you understand or tradeoffs you don't.

Understanding them is the point of self-custody education. Acting on that understanding is up to you.

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Self Custody: Part 2

crypto

Operational security and the identity layer

4 min readMarch 22, 2022
crypto

In 2022, federal authorities recovered $3.6 billion in stolen Bitcoin—the largest financial seizure in US history.

How did they find it? The thieves stored their private keys in cloud storage. Plain text. The blockchain never forgets, and neither did iCloud.

This case captures both sides of self-custody: the assets were stolen because the original owners trusted an exchange (Bitfinex, hacked in 2016). The thieves lost them because they trusted cloud storage. Everyone in this story made custody mistakes.

Part 1 covered what keys are. Part 2 covers how to actually protect them—and what happens when your wallet becomes your identity.

Key Takeaways

  • Operational security matters more than technical understanding. Most losses come from human error, not protocol failures.
  • Your wallet address is becoming a form of identity—with all the opportunities and risks that implies.
  • The custody spectrum runs from full self-custody to full delegation. Most people end up somewhere in between.

Operational Security

Theory is easy. Execution is where people lose money.

The Wallet Structure

Don't put everything in one place. A common setup:

Hot wallet (MetaMask, Phantom)

  • Small amounts for daily use
  • Connected to apps and sites
  • Accepts the risk of compromise

Cold wallet (Ledger, Trezor)

  • Larger holdings
  • Never connects to risky sites
  • Hardware device required to sign

Deep cold storage

  • Long-term holdings
  • Paper or metal backup only
  • Rarely or never accessed

The logic: if your hot wallet gets drained by a malicious contract, you lose spending money—not your savings.

Signing Discipline

Most theft doesn't come from cracked encryption. It comes from users approving transactions they didn't understand.

Before signing anything:

  • Read the transaction details. What contract? What permissions?
  • Verify the site URL. Phishing sites look identical to real ones.
  • Question unexpected requests. Legitimate protocols don't DM you asking to "verify your wallet."
  • Revoke old approvals. Token approvals persist. Sites like Revoke.cash let you audit and remove them.

The Seth Green incident from Part 1? He signed a transaction. That's all it took.

Physical Security

Your mnemonic phrase is a physical security problem, not a digital one.

Do:

  • Write it on paper, store in a safe or deposit box
  • Etch in metal for fire/water resistance
  • Split across multiple locations (advanced)

Don't:

  • Screenshot it
  • Store in cloud services
  • Email it to yourself
  • Type it anywhere except your wallet's official recovery flow

The $3.6B recovery happened because investigators got a warrant for cloud storage. Don't make it that easy—for anyone.

The Identity Layer

Your wallet address is more than a payment endpoint. It's becoming identity infrastructure.

On-Chain History

Every transaction is permanent and public. Your address accumulates a history:

  • Assets held over time
  • Protocols interacted with
  • NFTs owned
  • Governance votes cast

This creates reputation without requiring personal information. DAOs check wallet history before allowing participation. Protocols airdrop tokens based on past behavior. Your address is your resume.

Human-Readable Names

Raw addresses are hostile to humans:

0x47bb4cCA98FC49B971d86c5t26562c86E6284CeD

Domain services fix this:

  • ENS (Ethereum): yourname.eth
  • Bonfida (Solana): yourname.sol
  • Unstoppable Domains: .crypto, .wallet, etc.

These names resolve to addresses, work across many apps, and create consistent identity. Owning yourname.eth is like owning yourname.com in 1995—except it points to your wallet, not a server.

Caveat: Some exchanges still don't support sending directly to ENS names. Always verify before large transfers.

Pseudonymity vs. Anonymity

Self-custody enables pseudonymous participation—activity under a persistent identity that isn't linked to your legal name.

This matters for:

  • Privacy: Financial activity isn't automatically shared with banks, employers, or governments
  • Access: No discrimination based on nationality, credit score, or identity documents
  • Separation: Keep different activities in different wallets with different identities

But pseudonymity isn't anonymity. Sophisticated analysis can often link wallets to identities through exchange deposits, behavioral patterns, or metadata leaks. If privacy is critical, it requires active effort—not just using a wallet without KYC.

The Custody Spectrum

Self-custody vs. custodial isn't binary. It's a spectrum, and most sophisticated users operate at multiple points simultaneously.

Full Self-Custody

  • You control all keys
  • Maximum sovereignty
  • Maximum responsibility
  • Best for: significant holdings, technical users, jurisdictional concerns

Hybrid Approaches

  • Multisig: Multiple keys required to sign (e.g., 2-of-3)
  • Social recovery: Trusted contacts can help recover access
  • Smart contract wallets: Programmable rules for access and recovery

These reduce single-point-of-failure risk while preserving meaningful control.

Custodial Services

  • Exchange or institution holds keys
  • Familiar UX, customer support, insurance
  • Counterparty risk returns
  • Best for: small amounts, frequent trading, users who prioritize convenience

The Practical Reality

Many people use all three:

  • Exchange account for trading and fiat on/off ramps
  • Hot wallet for DeFi and daily transactions
  • Cold storage for long-term holdings

The question isn't "self-custody or not." It's "what level of custody for what purpose."

The Tradeoff Matrix

PriorityFavors Self-CustodyFavors Custodial
Security from exchange failure✓
Security from personal error✓
Privacy✓
Convenience✓
Regulatory clarity✓
Access to DeFi✓
Insurance/recovery options✓

Neither approach dominates. The right choice depends on your situation.

Making the Decision

Self-custody isn't about ideology. It's about threat modeling.

What are you protecting?

  • $500 in ETH? Exchange is probably fine.
  • $50,000 in diversified holdings? Consider cold storage.
  • Life savings in an unstable jurisdiction? Self-custody may be essential.

From whom?

  • Exchange insolvency? Self-custody protects you.
  • Your own mistakes? Custodial services might be safer.
  • Government seizure? Depends on the government and the custody arrangement.
  • Hackers? Both approaches have vulnerabilities—different ones.

The choice depends on what you're protecting and from whom. There's no universal answer, only tradeoffs you understand or tradeoffs you don't.

Understanding them is the point of self-custody education. Acting on that understanding is up to you.

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Category

crypto

Published

March 22, 2022

Reading Time

4 min read

Tags

crypto

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Contents

Key Takeaways
Operational Security
The Wallet Structure
Signing Discipline
Physical Security
The Identity Layer
On-Chain History
Human-Readable Names
Pseudonymity vs. Anonymity
The Custody Spectrum
Full Self-Custody
Hybrid Approaches
Custodial Services
The Practical Reality
The Tradeoff Matrix
Making the Decision