Custodianship refers to holding assets on behalf of a client, generally in the form of a financial institution. Custodial services are becoming sought after by asset owners because they can reduce security risks such as theft or loss.
What is Custodian?
Unlike banks, custodians are not allowed to use the assets they manage for personal gain. In exchange, these institutions are usually charged a fee for safeguarding the assets and can sell them according to instructions from the client.
In the cryptocurrency realm, custodial solutions involve a third party managing the private keys to user funds. This custodian has the ability to send and receive coins on behalf of the user, although legally the owner is still the user.
A custodial system is implemented by most crypto exchanges to improve user experience.
Also read: What is Ethereum (ETH) 2.0 and how is it different from Ethereum
Risk & Security
From a security perspective, a custodial solution may be preferred by new users who are unfamiliar with key management. However, it should be noted that this carries risks regarding the security of the custodian partner.
It is possible that custodians could be infiltrated or shut down, leaving users with few options to reclaim their assets.
Despite this, the role of custodians remains critical in this ecosystem, providing assistance to users of all skill levels.
As the industry has grown, many businesses have emerged to handle asset storage and management professionally, some even offering insurance to protect clients from potential loss of funds.
Also read: What is a block and how does it work in Blockchain
Conclusion
However, the general principle that remains true for the average user is to keep most assets in cold storage when not in active use, except for purposes such as staking, trading, or other passive income.
Also read:
What is a Block and How it Works in Blockchain
What Is Peer To Peer & How Does It Work? Read the explanation
Understanding Cryptocurrency and How It Works
What are Nodes and How They Work in Blockchain
DISCLAIMER: This article is informational in nature and is not an offer or invitation to sell or buy any crypto assets. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in fluctuations in crypto asset exchange rates.
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