Not Your Keys, Not Your Coins: The significance

"Not your keys, not your coins" is a common and essential maxim in the crypto space. If you don't own your keys, you cannot control your coins. This article highlights why it's crucial to own your keys.

Cryptocurrencies are transferred through a receiving address similar to a bank account number. The address is referred to in technical terms as the public key. When an individual sends another Bitcoin, they will transfer it to the recipient's public key. It's called public since you can send it to anyone without compromising your crypto.

Public Key Cryptography (PKC) is used to verify the authenticity of an item using asymmetric encryption. Cryptocurrencies use PKC to encrypt and decrypt transactions, which would otherwise be impossible.

However, a private key has to be linked to your public key. Any individual with access to the private key can access the assets on the public key, not tied to it. A private key functions like a password to identify the valid owner.

Thus, the term "not your keys, not your coins" refers to the private key.

What's the importance of owning my keys?

There are many reasons why a user would want to own keys rather than entrusting them with a third party, which might require them to trust their funds to them.

  1. Security

    Entrusting your keys to a third party could link you with malicious actors. That way, you would likely never get it back. However, this is highly unlikely with established firms.

  2. Control over personal assets & fees

    Although you may never manage your own money with third parties, they can set specific restrictions such as fees connected with utilizing their services or a maximum withdrawal limit. Third parties can also decide how you should use your hard-earned money.

    Still, if their network has any technical problems, you're technically locked out of your crypto assets.

In essence, provided you don't own your keys, you lack financial freedom, and your assets remain at the mercy of a stranger.

Also, you cannot control the security of the network's system either since you're outsourcing the security of your assets to third parties.

How public and private keys function harmoniously is critical to understanding how cryptocurrency transactions operate. When a user says they have cryptocurrency, they are saying that they have a private key that validates ownership of cryptocurrency. Because it's stored on the blockchain, any user can prove ownership with their public key.

Private keys are stored in a cryptocurrency wallet, a specialized hardware device, desktop, or mobile software.

Private keys allow you to set your own rules, and you can enjoy financial freedom since you fully own your coins.

To have your own keys, you need to ensure that you will be the only person accessing the private keys. If any other individual manages to gain access to them, they can use them to steal your cryptocurrencies.

With the current advanced functionality and configuration of cryptocurrency wallets, users may likely never handle the private keys directly as wallets usually manage them automatically for them. Users typically get a seed phrase that encodes their private keys for backup.

How to acquire private keys

Using hardware or software wallets, users can create personal crypto addresses. During this wallet generation process, private keys are created for each wallet. These keys are often in the form of mnemonic phrases, which are usually 15 ~ 24 words long. Users are required to save these keys in a safe place.

For the best security standards, these keys should be stored offline. They can be written down on a piece of paper and then stored safely to prevent loss through theft, fire, water damage, or misplacement. In fact, it's recommended to generate multiple copies of this record.

Types of crypto wallets

A non-custodial wallet is one that provides you complete control over your private keys. Examples include software, hardware, and paper wallets.

A custodial wallet is one that does not allow you complete control over your private keys. For instance, wallets are run by centralized cryptocurrency exchanges According to CorporateFinanceInstitute, several well-known centralized exchanges are Binance, Coinbase (Pro), Kraken, and Huboi Global.

A paper wallet is what you'd have if you actually wrote down your address and private key on paper. Although they are the least convenient, they are the safest choice. When you have a lot of cryptocurrencies to store for a while, you might want to use them.

Typically, consumers keep their cryptocurrency in a web or mobile wallet. Your keys and addresses are kept in that mobile app or web service. A well-known browser-based cryptocurrency wallet is Metamask.

A "hot wallet" is one that is online and is thought to be the most susceptible to hackers. Mobile wallets and cryptocurrency exchanges are two examples.

On the other hand, a cold wallet is thought to be safer because it is not connected to the Internet. Hardware wallets and paper wallets are two examples. The Future Money Wallet is only one of the numerous free services available for creating paper wallets.