"If they are not your key, it's not really your crypto".
This leads us to annual Proof of Keys Day on January 3rd, created by Trace Mayor. That day has been designated as a day to demand and take possession of your Bitcoin and cryptocurrency by moving it off of exchanges and into a wallet you have control over. Once moved, make a post on social media showing your solidarity to take control of your assets.
Does someone else have control of your funds?
If you have any money in the bank, that's what we call a Custodial Solution. Let's say for example;
You deposit your paycheck into your bank and then you write a check to pay a bill or use your debit card to withdraw money at an ATM or pay dinner at a restaurant.
In each of these examples your bank either pays on your behalf in the case of writing a check or using your card online to pay a bill. The bank receives a request and then transfers the funds from its accounts then indicates on your account ledger the funds have been withdrawn.
When you use your debit card at an ATM, the card in your pin are proof that it's you.
As far as the machine knows, who's making a request for the withdrawal and then distributes the cash to you and makes a record on your account. The cash you receive is not the same cash you put in however, it's commingled with all the other Banks finances and they only allow you to make a withdrawal. It is called a Trust Environment - you trust the bank to do what you want it to do in regards to your account and money but, what if they don't? There's always this possibility because they have control over or custody over your funds.
What is non-custodial or self custody look like?
Imagine the actual cash in your wallet or pocketbook, it's physically there and no one but you can decide what to do with it. You have total control to save it or spend it as you wish and there's no third-party involved with whom you need to check in on to make sure they're treating your funds correctly.
There's a lot more to this, but on its most basic level, a centralized crypto exchange is like your bank - you deposit and withdraw funds but ultimately the exchange controls all the funds in their company accounts and only allows you access based on your individual account information with them.
What allows them to do this?
They control the keys which allow them to access all their accounts on their systems. You may have an account number but that's only for personal identification, and they control everything else.
One example of a non-custodial is the Bitcoin.com wallet, where the funds are stored at your own address in your wallet just like the example we have earlier above, no one can ever limit your access to the wallet because you have the keys that control the wallet in your possession. However, Bitcoin.com only support Bitcoin (BTC) and Bitcoin Cash (BCH).
Advantages and disadvantages
An exchange like Binance, Kucoin and Houbi, for example, can decide like a bank to not allow access to your funds. On the other hand, holding your own funds put you at risks of losing them due to poor security practices.
Another risk of using custodial services is the exchange getting hacked.
Greatest histories of hacking
In 2019 alone, there were 7 major exchange hacks totaling up to over a $158 million.
At the beginning of the year, Cryptopia was hacked for $13 million and was never able to recover from the breach, eventually filing for bankruptcy and no customer funds were returned.
DragonEx, on March 26, was hacked to the tune of $7 million and no funds were ever reimbursed to the users.
Just a few days later, on March 30th, Bithumb lost almost $20 million due to a hack. They said all these came from company wallets and no user's funds were lost.
Then the most visible hack of the year - Binance!
On May 7th, had $40 million drained from their accounts. What did they do? They shut down deposits and withdrawals for a week while they sorted out the security to their systems. And of course, they allowed users to continue to trade on their off-the-chain internal ledger and all the customer's funds were covered by internal company wallets but the fact of a $40 million loss was too much to ignore.
BitTrue was then hacked on July 27th for $4.2 million and their customers were only promised a refund.
Next is BITpoint, on July 12th for $28 million, the result was about 500,000 users were locked out of their accounts for over a month.
Anyone who has been in the ecosystem for more than five years has certainly been affected in some way by the most famous exchange hack of all time - Mt.Gox!
When it was hacked, it was handling about 70% of the world's Bitcoin transactions. In early February of 2014, Mt.Gox halted all trading and withdrawals. They had lost over 850,000 Bitcoins (BTC) or $450 million worth of Bitcoin at that time.
It's mind-boggling to think about, now imagine, if all the banks in the world decided to suspend customer withdrawals.
What fixes this? Non-custodial crypto solutions.
Image source : coinrivet.com