Hardware Wallets Gain Popularity as FTX Collapse Pushes Users to Self-Custody
The FTX collapse pushed many users away from exchanges and into storing their own crypto. But the potential issue of human error remains.
FTX was not alone in creating this trend. Celsius Network, Three Arrows Capital, Terra, and other crypto companies failing in 2022, as well as the March 2023 banking crisis, significantly contributed to leading users into self-custody.
«Fuck Sam,» said a person whose funds are still trapped in FTX, referring to the founder and former CEO, currently a suspected criminal, Sam Bankman-Fried.
«But I should have managed my risk too,» this anonymous person told Wired.
He now stores his coins himself and puts them on exchanges briefly for trading purposes.
Another person in the same situation said that his crypto is now in an interest-bearing peer-to-peer contract or a personal wallet.
«Not your keys, not your money» became a mantra to live by in the crypto community. If a centralized entity holds your money, many experts argue, it’s not really yours. To make it yours, you need to self-custody it, aka put it in a cold wallet.
According to Hugh Brooks, director of security operations at blockchain security firm CertiK, however,
«There is a significant user-experience problem in crypto—and a lot of that has to do with self-custody and key management.»
It is true, Brooks said, that many users have turned to self-custody following the FTX collapse last November.
One of the giants, Ledger, saw the most successful month in its history in — you guessed it — November, according to its CEO and Chairman, Pascal Gauthier.
Amid the bear market and regulatory pressures, Ledger sold 1 million units between June 2022 and February 2023. In the previous eight years, it sold 5 million in total, Wired reported.
But, Brooks argued,
«For the average user, self-custody is a much greater risk.»
He warned that people forget or lose their wallet recovery phrases, and they often store them in insecure locations.
As a way to solve this, Ledger is working on the launch of ‘Ledger Recover’, a service that splits a recovery phrase into three encrypted shards and gives them to custodians: Ledger, custody firm Coincover, and code escrow company EscrowTech.
«A lot of people say they cannot enter crypto because they can’t manage the recovery phrase. It’s the industry problem,» Gauthier said. «Making that pain point go away will trigger a lot more people to join the space.»
Another major manufacturer, Trezor, offers Shamir Backup, a solution that enables users to split a recovery phrase into 16 shards to be given to trusted people or saved in safe locations.
However, Josef Tětek, Bitcoin analyst at Trezor, opined that, while he wants more people to use this solution, there also needs to be personal responsibility taken.
«If you want to claim financial sovereignty, you need to be in charge. We’re screaming that at the user at every step,» said Tětek.
There are also software wallets, namely MetaMask, working on technical solutions for managing recovery phrases, such as a new technical standard for Ethereum, per Simon Morris, chief strategy officer at ConsenSys, the wallet’s parent company.