Choosing the Right Bitcoin Self-Custody Solution

Choosing the Right Bitcoin Self-Custody Solution
Bitcoin Self-Custody Paths

In the world of Bitcoin, there are a variety of ways to custody your Bitcoin, and there is no one-size-fits-all solution. The best setup for you will depend on various factors, including how much Bitcoin you plan to custody, how frequently you need access to it, and your level of expertise. Below we will explore a few different ways to custody your Bitcoin and the trade-offs each presents.

What is Self Custody?

Fundamental to Bitcoin's security and long-term storage is the ability to self-custody; personally holding your Bitcoin without needing a bank or exchange intermediary. In short, self-custody means holding the private keys to your Bitcoin instead of relying on a separate entity to do so for you. By taking custody of your Bitcoin, you become your own bank. You can transact, save, and transport your Bitcoin with you anywhere and anytime, allowing for unmatched financial autonomy.

Private keys lie at the core of self-custody in Bitcoin. Whoever possesses the private keys to a wallet holds custody over the Bitcoin in that wallet, giving rise to the popular expression "not your keys, not your coins.” When you open a self-custody Bitcoin wallet, the private keys are given to you in the form of 12 words commonly referred to as a 'seed phrase' or 'recovery phrase' and should be kept secret and safe. Losing your private keys can result in the permanent loss of your Bitcoin. Below we will explore what self custody solution is best suited for you and your financial needs.

Individual Self-Custody Solutions

Singlesig Software Wallet

For those new to Bitcoin self-custody, singlesig software wallets (also known as hot wallets) stand out as the easiest entry point. Typically available as mobile or web applications, these wallets offer a beginner-friendly experience, making it very easy to set up your wallet and manage your Bitcoin holdings and private keys. It can be helpful to think of these wallets as similar to the wallet you carry around daily — they’re great for small sums and easy to access and transact with, but you wouldn't carry your life savings in them. The convenience these wallets provide ultimately comes with a trade-off, as these wallets lack the security found in other self-custody solutions. Examples include Blue Wallet, Blockstream Green, Electrum, and Sparrow. 

Despite their ease of use, singlesig software wallets pose higher security risks. Being constantly online may provide easier access to your funds, but they also become more susceptible to potential hacks, making them less suitable for safeguarding substantial amounts of Bitcoin. Moreover, the inherent vulnerability of singlesig wallets lies in their single point of failure — the private key. Since these types of wallets only employ one private key, if you lose access to your private key your Bitcoin may become irretrievable, emphasizing the need for proper key storage and caution when using singlesig wallets. The only way to mitigate this single point of failure is by using a multisig wallet like we offer at Theya, which we will explore below.

Singlesig Hardware Wallet

Taking a step beyond singlesig software wallets, singlesig hardware wallets (also known as cold wallets) emerge as a more secure option. These types of wallets typically come in the form of a hardware device often shaped like a USB drive. While they share similarities with singlesig software wallets, the key distinction lies in their offline nature, providing a significant boost in security for your Bitcoin holdings. Examples include ColdCard, SeedSigner, Blockstream Jade, Trezor, and Ledger.

Unlike their online counterparts, singlesig hardware wallets remain disconnected from the internet at all times. This isolation makes them a great choice for securing larger sums of Bitcoin, offering a heightened level of protection against online threats. However, their offline nature means they’re less practical for holding Bitcoin intended for frequent use, making them better suited for long-term saving strategies.

Singlesig hardware wallets also require a bit more technical proficiency, however, the abundance of available Bitcoin resources makes mastering their usage accessible to anyone willing to put in some time and research. Despite the advancements in security, it is important to note that these wallets still face a single point of failure due to having a sole private key associated with the wallet. Losing access to this private key can result in permanent loss of your Bitcoin. Ultimately, singlesig hardware wallets are an excellent choice for the average Bitcoin user seeking a secure storage solution for long-term savings, but proper key management and storage remain essential.

Multisig Wallet

Emerging as the pinnacle of self-custody and cold storage solutions for your Bitcoin, multisig is the best options for individual Bitcoin users to secure their funds without too much added complexity. Multisig involves securing your Bitcoin with a quorum of multiple private keys, and when done collaboratively can ensure very high security for your Bitcoin and remove any single points of failure without needing much technical proficiency or adding complexity. 

As the name suggests, multi-signature (multisig) wallets have a signing process that requires signatures from multiple private keys to access, transact, and move the Bitcoin held in self-custody. At any point in time, a subset of the total private keys associated with the wallet (typically 2 out of 3) will be needed to sign a transaction and spend the Bitcoin.

The main advantages of a multisig wallet are the heightened security it offers and the removal of any single point of failure. For example, At Theya, we offer a 2-of-3 multi-signature wallet through our streamlined app. This means your Bitcoin wallet would have a total of 3 private keys, and at any point, 2 of these private keys are needed to transact or move the Bitcoin. Theya holds 1 of these keys, and the other 2 keys would be assigned to two other separate devices. These other devices could be a smartphone or a hardware wallet of your choice.

By separating ownership of the private keys and requiring 2-of-3 private keys to access the Bitcoin, you add an additional layer of security to your Bitcoin wallet. No single key can access your Bitcoin at any point, allowing you to retain sole control over your funds. As the wallet owner in a multisig arrangement like Theya's, neither Theya nor any single key holder, such as a family member or friend you entrust a key to, can access your Bitcoin independently.

This distributed control mechanism ensures that access to funds requires consent from multiple key holders, enhancing security against unauthorized use and single points of failure. If you lose the private key you have in your possession, whether by theft, loss, or damage, Theya has your back. Because you separated ownership of the private keys associated with your wallet, you will still be able to recover your funds thanks to the private key Theya holds and the other key you or a trusted other still possesses.

While multisig wallets offer several advantages, it's crucial to acknowledge their drawbacks. Multisig wallets, while very secure, are not the most practical choice for Bitcoin you intend to use frequently. Instead, they shine in the realm of long-term storage, prioritizing security over ease of access.

Multisig wallets typically have more of a learning curve as well, demanding a bit more technical expertise. However, collaborative multisig solutions like we offer at Theya, aim to demystify the complexity and make multisig accessible to a wider audience. Our approach ensures that even users without technical knowledge can benefit from the enhanced security multisig offers. Ultimately, the additional security layers of multisig come at the cost of everyday practicality, yet for those looking to minimize the risk of loss or theft of their Bitcoin, this trade-off can be invaluable.

Determining if multisig is the optimal solution for you depends on a variety of factors and personal preferences. The positive news is individuals can have multiple Bitcoin wallets, each tailored to specific financial needs. Embracing different wallet setups allows individuals to optimize their approach to security and access, aligning with their unique requirements.

Institutional Self-Custody Solutions

Multisig Wallet

The baseline framework for institutions self custodying Bitcoin is a multisig wallet, singlesig is simply not secure enough for these types of arrangements due to their single point of failure. Multisig solutions elevate security by distributing control among multiple private keys. This secure framework establishes a collaborative approach to key management, minimizing the vulnerabilities associated with singular points of compromise. The use of multisig lays a solid foundation for institutional Bitcoin custody, forming the cornerstone upon which additional layers of security, such as Multiparty Computation (MPC) or Shamir's Secret Sharing (SSS), can be strategically integrated for a comprehensive and adaptive security posture.

Shamir’s Secret Sharing (SSS)

Shamir's Secret Sharing (SSS) is a cryptographic technique with significant applications in institutional Bitcoin custody. Named after its creator Adi Shamir, SSS allows the division of a secret, such as a cryptographic key, into multiple shares in a way that reconstruction requires a predefined threshold of these shares. In the institutional context, SSS offers a compelling solution to secure sensitive information and mitigate risks associated with single points of failure.

Institutions managing substantial Bitcoin holdings face unique challenges, and SSS provides an effective strategy for enhancing security. The application of SSS in institutional custody involves breaking down the private key into shares distributed among multiple parties. This ensures that no single entity holds the complete key, reducing the risk of unauthorized access or loss.

Advantages

Reduced Single Points of Failure: Unlike traditional single-key approaches, SSS eliminates the vulnerability associated with a single point of failure. Even if some shares are compromised or lost, the original secret remains secure as long as the predefined threshold is not breached.

Enhanced Security Thresholds: Institutions can customize the security threshold, determining the minimum number of shares required for secret reconstruction. This flexibility allows for a fine-tuned balance between security and operational needs.

Collaborative Security: SSS promotes collaborative security, where multiple stakeholders can collectively contribute to the custodial process without exposing the entire secret. This collaborative aspect aligns well with institutional structures that often involve multiple decision-makers.

Considerations

Complexity and Expertise: Implementing SSS may require a certain level of cryptographic expertise. Institutions may need to allocate resources for training or seek assistance from experts to ensure a secure implementation.

Key Management: While SSS mitigates the risk of a single compromised key, effective key management remains crucial. Institutions should establish clear protocols for the generation, distribution, and storage of shares to maintain the integrity of the custodial process.

Shamir's Secret Sharing stands as a powerful tool for institutions seeking advanced security measures in Bitcoin custody. By embracing the collaborative and threshold-based security offered by SSS, institutions can fortify their custodial practices and navigate the challenges of securing significant Bitcoin holdings in a dynamic digital landscape.

Multiparty Computation (MPC)

Multiparty Computation (MPC) is a cryptographic protocol that enables multiple parties to jointly compute a function over their inputs without revealing those inputs to each other. In the realm of Bitcoin custody, MPC offers a powerful approach to securing sensitive operations, such as private key management and transaction signing.

MPC allows multiple parties to collectively contribute to the generation and management of cryptographic keys without any single entity possessing the complete key. In Bitcoin transactions, MPC enables the collaborative signing of transactions without exposing the full private key. Each party contributes a share, and the transaction is signed collectively.

Advantages

Enhanced Security: MPC significantly raises the security bar by eliminating the need for any single entity to possess the entire key. Even if some parties are compromised, the full private key remains secure.

Collaborative Security: MPC fosters collaborative security, allowing multiple parties to participate in critical operations without the need to fully trust each other. This approach aligns well with scenarios involving shared responsibilities.

Privacy Preservation: The cryptographic nature of MPC ensures that each party's input remains confidential. This privacy preservation is crucial in scenarios where sensitive information must be shared for a common goal without exposing individual contributions.

Considerations

Technical Expertise: Implementing MPC may require a certain level of technical expertise. Organizations should ensure they have the necessary skills or seek assistance from experts during the implementation phase.

Scalability: MPC solutions should be evaluated for scalability, especially when dealing with larger operations or managing a significant volume of transactions. Ensuring that the chosen MPC protocol can scale to meet the demands of institutional use is crucial.

As the field of cryptography evolves, ongoing research and development are likely to bring about advancements in MPC techniques. These may include efficiency improvements, reduced computational requirements, and expanded use cases, further solidifying MPC's role in the realm of secure Bitcoin custody.

Multiparty Computation stands as a viable solution for institutions seeking advanced security measures in Bitcoin custody. By leveraging collaborative computation without revealing sensitive inputs, MPC addresses critical security concerns, making it a powerful tool in the realm of institutional Bitcoin custody.

Multisig and MPC or SSS

Institutions navigating Bitcoin custody are presented with many security options. A strategic approach could involve harnessing the strengths of multiple solutions. Combining the robust security of Multisignature (multisig) wallets with the collaborative privacy of Multiparty Computation (MPC) or the enhanced resilience offered by Shamir's Secret Sharing (SSS) creates a powerful synergy. This fusion enables institutions to strike a balance between security, operational efficiency, and risk mitigation. By leveraging the strengths of multisig, MPC, and SSS, institutions can craft a custodial strategy tailored to their specific needs, ensuring a resilient and adaptive custody framework for the safeguarding of their Bitcoin.

The Bottom Line

In all cases, multisig emerges as the pinnacle of self custody solutions for long term Bitcoin storage. Regardless of whether you're an individual navigating personal holdings or an institution managing substantial assets, multisig offers a foundational level of security without introducing unnecessary complexity. Its distributed control mechanism minimizes the risks associated with single points of failure, providing unmatched resilience. As the cornerstone of your custodial strategy, multisig not only elevates security but also serves as an adaptable framework that can be complemented with advanced solutions like Multiparty Computation (MPC) or Shamir's Secret Sharing (SSS). In the world of Bitcoin custody, mastering security begins with multisig.