What is multichain self-custody, and why does it matter?

What is multichain self-custody?

As a seasoned crypto enthusiast who’s been navigating the digital asset landscape for over a decade, I’ve seen the evolution of self-custody from a niche concept to a mainstream practice that has transformed how we interact with decentralized finance.

I remember my early days when managing private keys felt like trying to crack the Da Vinci Code, but today, multichain wallets have simplified the process and made it more accessible for everyone. However, as someone who’s lost assets due to a key loss incident, I can attest to the importance of treating your keys with utmost care and diligence.

The rise of multichain self-custody has brought us closer to realizing the true potential of a decentralized world, but it also presents new challenges that require constant vigilance. The risks associated with bridging assets between chains and user error can be daunting, but as someone who’s learned from my mistakes, I believe that education and caution are key to overcoming these hurdles.

counterparty risks and limited control over your assets. If you’re serious about investing in digital assets, understanding self-custody is essential for maintaining control and security over your investments.

And as for the joke, let me leave you with this: Why did the crypto investor cross the road? To get to the other side of the blockchain!

Managing your own digital assets across various blockchain networks, rather than depending on external custodians, is known as multichain self-custody.

This system unites the idea of self-guardianship, where you directly manage your cryptocurrency assets using private keys, with a smooth functionality that works across multiple blockchain networks, including Ethereum, Solana, Aptos, and Sui.

As a researcher exploring the realm of blockchain technology, I’ve discovered an efficient approach that simplifies asset management for users – by harnessing the power of multichain wallets or decentralized tools. This method enables users to gather all their assets into one user-friendly interface, thereby diminishing complexity and streamlining their experience.

On the other hand, this idea differs significantly from third-party custody arrangements, where a central authority controls and maintains users’ private keys for them. These private keys play an essential role in gaining access to and moving cryptocurrencies.

In a self-storage system, individuals keep their assets safe using hardware wallets, software wallets, or other secure storage options. Examples of self-storage wallets include Ledger, Trezor, and MetaMask, along with several others.

Managing your own digital assets becomes increasingly crucial as platforms for decentralized finance (DeFi), non-fungeable tokens (NFTs), and cross-chain protocols gain more attention. This is because these trends often necessitate users to handle assets spanning numerous blockchain networks in a smooth and safe manner.

Self-custody vs. third-party custody

Keeping your assets under self-custody empowers you to be the sole owner, minimizing potential risks associated with centralized management. These risks can include the platform going bankrupt, government seizures due to regulations, and hacker attacks on the custodians themselves.

Understanding the difference between self-custody and third-party custody is crucial, as it clarifies who retains full authority over the assets in question.

By keeping your own control over your Bitcoins (BTC), you avoid the dangers of dealing with other parties, but there are still potential hazards. Approximately 3-4 million BTC have been rendered inaccessible because their private keys were forgotten.

Using your own wallet for storing cryptocurrencies removes risks linked to third-party mishandling, but it means that the responsibility for safeguarding your private keys falls entirely on you. If you lose or forget your private keys, you’ll no longer have access to your assets and they will be lost permanently. Using a third-party service for custody might come with restrictions, fees, and potential lack of transparency about how your assets are handled. On the other hand, self-custody offers transparency and gives you full control over your decisions.

2022 saw significant failures like FTX, Celsius, and BlockFi, highlighting the potential dangers associated with third-party storage. This has led a growing number of people to explore self-custody options for their digital assets due to increased risk awareness.

The rise of multichain ecosystems

A multi-chain future imagines a blockchain world where numerous self-governing chains live together, communicate, and facilitate effortless movement of assets and data.

In my analysis, it appears that the previous notion of a “winner-takes-all” blockchain ecosystem, where a single dominant blockchain would overshadow and eventually replace all others, is being challenged. Instead, I see a more diverse, multichain future unfolding, where different blockchains coexist, each catering to unique functions or requirements.

Here are some key blockchain ecosystems shaping this multichain reality:

• Ethereum and EVM-compatible chains like BNB Smart Chain, Avalanche and Polygon are the incumbent blockchain ecosystems. 
• Rust-based chains like Solana and SVM-compatible chains are known for their speed, scalability and low transaction frictions. 
• Emerging blockchains like Aptos and Sui are based on the Move programming language. 

An interconnected system of multiple blockchains is important due to their individual strengths in areas like decentralized finance (DeFi), non-fungible tokens (NFTs), and supply chain management. By fostering compatibility and facilitating cross-chain operations, we can tap into immense possibilities for wider acceptance and advancement.

Several trends and data points suggest a multichain future is unfolding.

• The rise of non-Ethereum layer-1 blockchains such as Solana, Polkadot and Avalanche indicates user demand for alternatives that address Ethereum’s scalability issues.
• The growing adoption of crosschain bridge technologies like Wormhole, LayerZero and Axelar demonstrates an increasing need for interoperability.
• Data shows significant total value locked (TVL) of $121 billion across multiple chains, not just Ethereum, reflecting a diversification of DeFi activity.
• Chains like Solana and Polygon have gained traction in the NFT space, creating ecosystems independent of Ethereum’s dominance.
• Aptos and Sui are gaining attention for their scalability and security, attracting developers and investors alike.
• The Base chain that is backed by Coinbase has seen tremendous growth through 2024. Base, along with Solana, has contributed to the rise of memecoins’ market cap of $106 billion.

This data shows how eager the market is towards a variety of blockchain networks and the means to link them together. Consequently, it’s essential for users to effortlessly navigate interactions and transfer assets smoothly among these different platforms.

As someone who has been deeply involved in the cryptocurrency world for years now, I can’t help but be alarmed by recent developments such as the $321-million hack of Wormhole in 2022 and the potential vulnerabilities found in LayerZero’s protocol. These incidents serve as stark reminders that bridging assets across different networks is not without its risks, and it’s essential for users to be aware of them.

In my experience, I’ve seen countless projects collapse due to security flaws, and the consequences can be devastating. The hack on Wormhole, for instance, exposed sensitive user data and led to significant financial losses. Similarly, the vulnerabilities in LayerZero’s universal messaging layer connecting different chains could potentially lead to exploits that put users at risk.

It’s crucial for us as a community to stay informed about these developments and take steps to protect ourselves from potential threats. We should always do our due diligence before investing or using any service, and never forget that the world of cryptocurrency can be unpredictable and volatile.

How Multichain wallets enable self-custody in a decentralized ecosystem

With more cross-chain transactions happening, wallets are expected to adapt, allowing users to handle assets and apps from multiple blockchain networks. Wallets like MetaMask, Phantom, and Exodus are examples of these versatile, multichain wallets.

In a multi-chain world where various wallets vie to offer smooth functionality across multiple chains, it’s evident that user experience is increasingly vital. This competition contributes significantly to the promotion of self-custody as the preferred method for managing assets. In a multichain environment, self-custody assumes even greater importance since users must manage their assets across various blockchain systems.

Here’s how self-custody aligns with the needs of a multichain environment:

• Users often need to bridge assets or interact with decentralized applications (DApps) on different chains. Self-custody wallets simplify this process while maintaining control. 
• Managing assets across multiple blockchains can increase exposure to risks such as bridge exploits. Self-custody minimizes reliance on centralized intermediaries.
• Self-custody empowers users to manage their assets independently, free from centralized control, ensuring financial sovereignty.

Using a multichain wallet allows users to oversee their assets distributed among various ecosystems from a unified dashboard, all the while preserving personal control (self-custody) over those assets. This means that no external entities can freeze or seize your assets, thus upholding your financial independence.

Recent developments in multichain self-custody

2024 saw substantial improvements in multichain digital wallets, leading to enhanced user interactions and a broader range of blockchain compatibility.

Here’s an overview of notable developments:

• Trust Wallet has expanded its support to over 100 blockchains, solidifying its position as a leading multichain wallet. This extensive support enables users to manage a diverse range of digital assets within a single platform.
• UXUY has integrated its wallet services into Telegram, allowing users to manage their crypto assets directly within the messaging app. This integration aims to streamline the user experience by combining social interaction with financial management.
• OKX Wallet has enhanced its multichain capabilities, enabling users to access and manage assets across various blockchains seamlessly. 
• SafePal offers a hardware wallet that supports multiple chains, providing users with a secure method to store and manage their digital assets offline. This solution caters to security-conscious users seeking to protect their investments from cyber threats.
• MathWallet has developed a comprehensive multichain ecosystem, supporting numerous blockchains and offering features such as crosschain token exchanges and DApp access. 
• Phantom, initially a Solana-focused wallet, has expanded its support to include Ethereum, Bitcoin, Sui and Polygon, enabling users to manage assets across these blockchains. Phantom was also ranked as one of the top seven free apps on the Apple Store in November 2024 and boasts a user base of over 7 million.
• Backpack is a minimalistic, multichain wallet available for Solana, Ethereum and Arbitrum. It offers features such as xNFTs, which are decentralized applications operating within the wallet, and NFT collection locking for enhanced security.

Risks associated with multichain self-custody

Self-managing multiple digital wallets comes with potential hazards like losing access keys, experiencing security breaches, making mistakes on your part, having no insurance coverage, and being vulnerable to hacking incidents on bridges.

Let’s understand these risks in a bit more detail:

• Losing private keys means losing access to assets permanently. Managing keys securely requires significant diligence.
• Self-custody can be challenging for non-technical users, increasing the likelihood of mistakes like phishing attacks or incorrect transfers.
• Bridging assets between chains can expose users to vulnerabilities in bridge protocols, requiring extra caution.
• Unlike custodial solutions, self-custody offers no fallback for lost assets, emphasizing the importance of user education.
• While regulated custodians offer insurance for at least part of the asset holdings, self-custody insurance products are not common.

Did you realize? Back in March 2022, cybercriminals successfully targeted and stole more than $600 million worth of assets from the Ronin Bridge, which serves as a connection point between the Ronin Network and Ethereum. The theft was made possible by the unauthorized access to private keys, underscoring the potential dangers that come with transferring assets across various blockchains.

Alternatives to self-custody

For individuals who consider managing their own assets as overly complicated or risky, there are options available through external custody services instead.

These platforms accommodate both individual shoppers and large institutions, providing a range of ease, safety, and governance. Exchanges such as Coinbase, Binance, and Kraken offer custodial services, where they manage the users’ private keys on behalf of the users.

For everyday users, these transactions serve as the most popular substitute. Their user-friendly design and streamlined asset management systems make them effortless for individuals who prefer not to handle their personal cryptographic keys directly.

Many custodians offer insurance for users’ assets and services like trading, staking, and lending. Yet, these services come with counterparty risks, meaning users must trust in the exchange’s financial stability and safety measures.

Certain businesses offer specialized custodial services catering to institutional clients, featuring enhanced security protocols and adherence to strict regulations. Although these service providers boast robust security, regulatory, and client protections, they tend to be pricier and might not align with the needs of smaller investors.

Managing various assets across different blockchain networks becomes more straightforward due to the increasing use of multi-chain wallets. This trend moves us one step closer to realizing a truly interconnected, multi-chain universe. As this space evolves, it will be essential for individuals aiming for secure and assured navigation within the decentralized world to grasp and utilize self-custody principles.