Since the inception of bitcoin, self-custody – the ability to manage and hold your own assets without relying on a third-party intermediary such as a bank or financial institution – has been fundamental to its appeal.
For some individuals, self-custody embodies a strong conviction in the principle of “being your own bank.” For others, it serves as a tactical measure to protect a valuable commodity that can be – and has been – lost due to exchange hacks, poor management, or collapses akin to FTX. It’s similar to storing a safe full of cash at your residence; if there’s a run on the “bank,” your coins remain secure.
While the “how” of self-custody has transformed over bitcoin’s journey, the current standard for recovery – the seed phrase – often leaves users facing significant (sometimes overwhelming) losses when troubles arise.
A Distinction Without A Difference
In bitcoin’s early days, self-custody was the only option. To oversimplify, self-custody involved managing private key data – a combination of 64 random characters that granted access to the underlying bitcoin. Tools for managing private keys were limited: you either memorized them or documented them for safekeeping. But if just one character is misplaced, oops, your key is rendered ineffective. Even with perfect execution, there remains a tangible risk of loss – due to theft, accidents, or disasters.
Seed phrases were introduced to simplify private key management. Rather than securing lengthy strings of random characters, Bitcoin Improvement Proposal-39 (BIP-39) allows a few simple words to represent a private key. Provided the correct sequence of words is retained, you can always regenerate the same private key and access your funds.
While managing a small number of familiar words is certainly easier than handling extensive character strings, the risk of loss due to human error, theft, or disaster is essentially unchanged with a seed phrase, just as it was with private keys. For anyone who has lost a backup during critical moments, this distinction is negligible. Once it’s lost, it’s irretrievable.
Moving Beyond Stone Age Security For Space Age Assets
At some point, the concept of self-custody became equated with seed phrases in many people’s minds. However, self-custody isn’t a tangible object; it’s a function. And seed phrases often represent more of a liability than a capability.
Admittedly, a seed phrase enables you to regenerate your keys or transfer your funds to another wallet, but it also allows anyone who glimpses it briefly to do the same. It’s a nuclear option – allowing anyone who possesses it access to its entire contents. This is why many users resort to dated security measures to protect them: burying them, employing book ciphers, distributing copies and hiding them, stamping them on increasingly heat-resistant metals, and so forth.
The notion that the pinnacle of security for digital currency could be as simple as burying a coffee can in the yard is quite absurd. That’s Stone Age security for a Space Age asset. Furthermore, the notion that the primary recovery method for most individuals is something easily lost raises the question: if you can misplace it so readily, is it truly a recovery tool at all?
While handling a seed phrase might be preferable to managing private key data, it still falls short – not in terms of security or safety, not concerning user experience, and ultimately not fostering bitcoin’s expansion and widespread acceptance.
The Future Of Money Should Work Like The Future Of Money
Bitcoin itself originated as, and is designed to be, digital cash. Ultimately, it is software intended for operation and use. For far too many users, securing it has become a source of considerable anxiety and practical hurdles. A better solution exists.
The future of money should resonate with how it operates and ultimately be secured, reflecting the future instead of an outdated past. It should unlock new capabilities, inspire confidence, be intuitive and even enjoyable to use – and you shouldn’t lose access to your coins merely because of a typo or a lost piece of paper.
Even the most dedicated, self-sovereign bitcoin enthusiasts will concede: seed phrases are cumbersome. They are clunky temporary measures and were never intended to be the ultimate solution for an ostensibly digital currency. We should cease regarding them as the defining feature of self-custody.
This is a guest post by Max Guise. The views expressed are entirely his own and do not necessarily represent those of BTC Inc or Bitcoin Magazine.