How non-custodial wallets let you be your own bank

Daniel McGlynn - Tuesday, July 10th, 2018

Abra includes an important feature that will essentially allow you to be your own bank.

It’s called a non-custodial wallet, and it eliminates the need to trust a centralized third-party.

Another way to think about it is that Abra’s user assets all live in user-controlled addresses on the Bitcoin or Litecoin blockchains, enabling transparency, liquidity, and security.

A non-custodial wallet fully leverages the power of permissionless blockchain technology, which enables peer-to-peer transactions without the need for an intermediary. In this instance, Abra operates on top of that model, providing a layer of support and functionality (by making it possible to exchange 28 cryptocurrencies and 50 fiat currencies) without getting in the way of user control and security.

The alternative, which is used as the backbone for most of today’s crypto exchanges, is a custodial arrangement. A recent article on CoinDesk points out that “a few big players — both centralized and custodial in nature — handle the bulk of trading vote for the $381 billion-worth of the world’s crypto assets.”

Custodial exchanges operate a lot like traditional banks, with accounting and risk management structures that prioritize exchange security over user security by putting a layer of control between people and their assets.

One risk is the security vulnerabilities for the exchanges that are inherent in the custodial model. In early 2014, the Japan-based Mt. Gox, an early and massive exchange (at one point 70% of all bitcoin transactions were happening on Mt.Gox) was hacked. The loss was valued at over $450 million at the time, but maybe more damaging was the harm done to bitcoin’s reputation.

And those kinds of risks are not only part of bitcoin’s coming-of-age-story — they are ongoing. At the beginning of this year, roughly $530 million of cryptocurrency was stolen from another Japanese exchange, called Coincheck.

And in June 2018, two Korean exchanges were hacked (Bithumb and Coinrail) collectively losing an estimated $70 million worth of cryptocurrency.

Hold those private keys

Since Abra’s wallet is blockchain-based, a user must control his or her private keys, which requires a level of personal responsibility that more closely resembles a cash-based system, rather than a bank-based system.

If you lose, misplace, or otherwise mismanage cash, there’s a high likelihood that that cash will disappear forever. Same thing with a blockchain-based private key. If you lose or incorrectly record your private key, you will no longer be able to access your blockchain-based assets.

While this all might seem a bit complex, we believe that in the long run, the non-custodial setup actually has more advantages for the user, with privacy and security being chief among them.

How a private key is created and what it looks like

When new users download the Abra app, a unique private key is created in the form of a mnemonic phrase, which is called the recovery phrase.

Abra’s recovery phrase is randomly created using words so that it’s easier for people to interact with, but it actually consists of encrypted numbers and letters that make up the key needed to access assets stored on the blockchain.

Best practice for handling a private key is to write it down on paper and then store the paper in a secure place. Make sure and test the private key before transferring funds into the wallet.

It’s also recommended to never take a photo of a recovery phrase or keep the phrase on any kind of internet-connected device.

Tags: ,