The Importance of Self-Custody in Cryptocurrency

In the rapidly evolving world of cryptocurrency and blockchain technology, one principle remains paramount: self-custody. This concept, often encapsulated in the phrase "not your keys, not your crypto," is at the heart of the crypto revolution. In a recent episode of the Validated podcast, host Austin sits down with Charles Guillimet, CTO of Ledger, the world's leading hardware wallet company, to discuss the critical importance of self-custody and the role of security in the crypto ecosystem.

What is Self-Custody?

Self-custody in cryptocurrency refers to the practice of holding and managing your own private keys, which are essential for accessing and transacting with your digital assets. As Charles Guillimet emphasizes, "Self-custody is really important, and from my standpoint, if you don't self-custody, you are just trading it as you would trade stocks on the regular market. But this is not the revolution that web 3 is about. Web 3 revolution is about self-custody."

The concept of self-custody is rooted in the fundamental promise of cryptocurrency: to provide individuals with true ownership and control over their assets. When you hold your own private keys, you have complete autonomy over your funds, without relying on intermediaries or centralized institutions. This aligns perfectly with the decentralized nature of blockchain technology and the ethos of financial sovereignty.

The Spectrum of Wallets

To understand self-custody, it's essential to grasp the various types of wallets available in the crypto ecosystem. Charles Guillimet breaks down the spectrum of wallets into several categories:

1. Software Wallets: These are applications or browser extensions like Phantom or MetaMask that store your private keys on your device. While convenient, they are potentially vulnerable to malware and hacking attempts.

2. Hardware Wallets: Devices like those produced by Ledger, which store private keys in a secure, offline environment. These offer a higher level of security by keeping the keys isolated from internet-connected devices.

3. Hot Wallets: Wallets that are frequently used and connected to the internet, making them more convenient for regular transactions but potentially more vulnerable to attacks.

4. Cold Wallets: Wallets that are kept offline and used for long-term storage of large amounts of cryptocurrency, providing enhanced security at the cost of convenience.

The Evolution of Hardware Wallets

Ledger, founded in 2014, has been at the forefront of hardware wallet development. Charles Guillimet explains the evolution of their products:

"At the beginning of Ledger, we built some hardware wallet which was based on smart card technology. And we are still using smart card technology. But the very first device did not embed a secure display. There was no screen on it. So that was mostly a security key where you put your priority inside and the cryptography is implemented inside."

The introduction of the Ledger Nano S marked a significant milestone, featuring a secure display that allowed users to verify transaction details directly on the device. This advancement addressed a crucial security concern by providing a trusted way for users to confirm the details of their transactions.

The Importance of Trusted Display

Charles Guillimet emphasizes the three main security properties of Ledger devices:

1. Key generation inside a secure enclave
2. Ensuring keys never leave the enclave
3. A trusted display for transaction verification

The trusted display is particularly crucial for cryptocurrency transactions. As Guillimet explains, "What you see is what you sign because whenever you want to make a transaction, you want to have a trusted way to understand what kind of transaction you are about to consent."

This feature prevents scenarios where users might unknowingly sign malicious transactions that could drain their wallets or grant unauthorized access to their assets.

The Weakest Link: User Education

Despite the advanced security features of hardware wallets, the cryptocurrency industry faces a new challenge: user education. Charles Guillimet observes, "The missing part is mostly education. Like people need is mostly like phishing or scams rather than real attacks."

This shift highlights an important transition in the crypto security landscape. While technological solutions have significantly improved, human error and lack of understanding now pose the greatest risks to users' assets. Incidents like the one involving Kevin Rose, who reportedly lost over a million dollars worth of NFTs to a phishing scam, underscore the importance of user education and vigilance.

The Role of Ledger in the Crypto Ecosystem

Ledger has established itself as the dominant player in the hardware wallet market. Charles Guillimet attributes this success to several factors:

1. Choosing the right technology from the start
2. Adopting a blockchain-agnostic approach
3. Building an open platform that supports multiple cryptocurrencies
4. Fostering community development of applications

The company's strategy of openness and flexibility has allowed it to support over 150 different applications on its devices, most of which have been built by the community.

The Closed-Source Debate

One interesting aspect of Ledger's approach is that while much of their software is open-source, the core module that runs on the device itself remains closed-source. This decision has been a topic of debate in the crypto community, which generally favors open-source solutions for security and transparency.

Charles Guillimet explains the reasoning behind this decision: "When we decided to choose the security element technology, the smart card technology, we knew that some part of our code couldn't be open source because like security elements, smart card technology, they like the vendor goes through a security certification. And in order for them to obtain the substitution, they need to be quite opaque on like how this circuit operates."

While Ledger remains committed to openness where possible, they prioritize security over complete transparency in this instance. The company is exploring ways to open-source more components of their system while maintaining the necessary security certifications.

The Enterprise Side of Self-Custody

As the crypto industry matures, the need for enterprise-level self-custody solutions has become apparent. Charles Guillimet discusses how Ledger is addressing this market:

"Self-custody is really, really important, as I mentioned before, and this is the purpose of this Web3 revolution, let's say. And when we say this, we really think about like in retail self-custody. But at some point you have also companies who are holding like digital assets, whether this is NFT or cryptocurrency. And these companies also need like a way to store and manage their cryptocurrency."

Enterprise solutions require additional features like governance structures and multi-signature approval processes. Ledger is working on developing solutions that maintain the principles of self-custody while meeting the complex needs of larger organizations.

The Challenge of Mass Signing Infrastructure

As blockchain technology becomes more integrated into everyday life, the need for efficient, secure signing of multiple transactions becomes more pressing. Charles Guillimet acknowledges this challenge:

"For the use cases of tomorrow, where you will have to sign very often with wallets, definitely having to click on the device several times a day is not good. There is a lot of friction for that. And that's why we need like different solution for that."

Ledger is exploring various solutions to this problem, including the possibility of integrating their security technology more closely with smartphones. They're also looking at blockchain-level solutions like account abstraction, which could allow for different security levels for different types of assets or transactions within the same wallet.

The French Blockchain Ecosystem

The conversation also touched on the state of the blockchain industry in France, where Ledger is based. Despite having a strong foundation in mathematics and cryptography, France has not been at the forefront of blockchain innovation. Charles Guillimet attributes this to two main factors:

1. A complex administrative environment for startups
2. A cultural aversion to failure and risk-taking

However, he notes that the French government is increasingly recognizing the importance of not missing out on the blockchain revolution, which could lead to more supportive policies in the future.

The Impact of Exchange Collapses on Self-Custody

The collapse of major cryptocurrency exchanges like FTX in 2022 has had a significant impact on the adoption of self-custody solutions. Charles Guillimet sees a silver lining in these events:

"During 2022 with FTX and sales use and others, it really unfasties like the importance of self custody. And on the long run, I think it was a positive event. It's difficult to say this today because I know plenty of people who lost money and that was really unfortunate. I agree with that. Nonetheless, like this kind of events are for size even more like the importance of self custody."

These incidents have led to a surge in hardware wallet sales and increased awareness about the risks of leaving assets on centralized exchanges.

The Future of Blockchain and Self-Custody

Looking to the future, Charles Guillimet identifies scalability as one of the most pressing challenges facing blockchain technology:

"I'm really, really interested in like how we are about to solve the scalability challenge that we have on blockchain because this is something we don't clearly understand, but the blockchain we have today have a very low throughput and it's a big issue."

He discusses the potential of layer-2 solutions and the ongoing efforts to balance scalability, security, and decentralization in blockchain systems.

The Role of Solana in the Blockchain Ecosystem

While the conversation primarily focused on self-custody and Ledger's role in the crypto ecosystem, it's worth noting the growing importance of blockchains like Solana in addressing some of the scalability challenges mentioned by Guillimet. Solana's high-throughput, low-latency architecture offers a potential solution to the scalability issues faced by many first-generation blockchains.

Solana's approach to scalability, which includes innovations like Proof of History and the Gulf Stream mempool-less transaction forwarding protocol, aligns well with the industry's need for more efficient, high-performance blockchain solutions. As the crypto ecosystem continues to evolve, platforms like Solana are likely to play an increasingly important role in enabling the mass adoption of blockchain technology and decentralized applications.

The Importance of Permissionless Systems

Charles Guillimet emphasizes the critical nature of permissionless systems in the blockchain space:

"Permissionless means like you are in self-custody and no one can prevent you to own your value and to transact it. And this is possible through self-custody and decentralization."

This principle of permissionlessness is at the core of the crypto revolution, enabling true financial sovereignty and freedom from centralized control. As the industry continues to develop, maintaining and enhancing these permissionless attributes will be crucial to realizing the full potential of blockchain technology.

Education as the Key to Adoption

Throughout the conversation, the importance of user education emerges as a recurring theme. As Charles Guillimet notes, "The missing part is mostly education. Like people need is mostly like phishing or scams rather than real attacks."

This highlights the need for comprehensive educational initiatives within the crypto space. As hardware wallets and other security solutions become more sophisticated, the human element remains the most vulnerable point in the system. By focusing on educating users about best practices, common threats, and the fundamental principles of blockchain technology, the industry can significantly enhance overall security and foster responsible adoption.

The Role of Exchanges in Promoting Self-Custody

While centralized exchanges have often been seen as antithetical to the principles of self-custody, Charles Guillimet sees a potential shift in their approach:

"If you check carefully what the CEO of Coinbase or Kraken are saying about that, like they say, leave only on the exchange what you need to trade and for the rest, get off of the exchange and use a hardware wallet."

This evolving stance from major exchanges could play a crucial role in promoting self-custody practices among their users. As exchanges begin to develop their own wallet solutions and integrate with hardware wallets like Ledger, they have the potential to become important educators and advocates for self-custody principles.

The Timing of Hardware Wallet Adoption

When asked about the right time for someone to buy a hardware wallet, Charles Guillimet's response is unequivocal:

"For me, the best time to buy a hardware wallet is now or maybe yesterday. And it's not a matter of like how much crypto you have. I understand that sometimes people say I only have like a 5,000 USD in crypto. That's not worth having a hardware wallet and so on. But for me, when you buy a hardware wallet, the first thing you get is a lesson. You have a cryptocurrency lesson."

This perspective frames hardware wallet adoption not just as a security measure, but as an educational tool that helps users better understand the fundamental principles of cryptocurrency ownership and management.

The Potential for an "Undo Button" in Blockchain

When discussing potential future developments in blockchain technology, the concept of an "undo button" for transactions was raised. Charles Guillimet's response provides insight into the limitations and possibilities of such a feature:

"I think you can imagine an undo button exactly as you have an undo button in Gmail. When you send an email, you have a few seconds to cancel. This is the only undo button that you can do. Otherwise, it doesn't make sense, I think."

This perspective highlights the delicate balance between user-friendliness and the immutable nature of blockchain transactions. While some form of cancellation within a short time frame might be possible, maintaining the integrity and finality of transactions remains a core principle of blockchain technology.

The Challenges of Decentralization

The conversation also touched on the challenges of maintaining true decentralization in blockchain networks. Using Solana as an example, Charles Guillimet notes:

"Decentralization of Solana, it can be a challenge. And I would say this mostly because it's quite difficult to run your own node, like running a node on Solana is like 1000 times more difficult than on Bitcoin, for instance, and you can run a Bitcoin node on your phone if you want."

This observation highlights the ongoing debate in the blockchain community about the trade-offs between scalability, security, and decentralization. While high-performance blockchains like Solana offer significant advantages in terms of speed and transaction throughput, maintaining a high level of decentralization remains a challenge that the industry continues to grapple with.

The Future of Blockchain Scalability

Looking towards the future, Charles Guillimet expresses particular interest in how the industry will address the scalability challenges facing blockchain technology:

"I'm really, really interested in like how we are about to solve the scalability challenge that we have on blockchain because this is something we don't clearly understand, but the blockchain we have today have a very low throughput and it's a big issue."

He goes on to discuss the potential of layer-2 solutions and other innovations that aim to increase transaction throughput while maintaining the security and decentralization of base layer blockchains. This ongoing quest for scalable solutions is likely to be a defining challenge for the blockchain industry in the coming years.

The Importance of Permissionless Systems

Throughout the conversation, Charles Guillimet repeatedly emphasizes the critical importance of permissionless systems in the blockchain space:

"Permissionless means like you are in self-custody and no one can prevent you to own your value and to transact it. And this is possible through self-custody and decentralization."

This principle of permissionlessness is at the core of the crypto revolution, enabling true financial sovereignty and freedom from centralized control. As the industry continues to develop, maintaining and enhancing these permissionless attributes will be crucial to realizing the full potential of blockchain technology.

The Role of Hardware Wallets in the Crypto Ecosystem

As the conversation draws to a close, it's clear that hardware wallets like those produced by Ledger play a crucial role in the broader cryptocurrency ecosystem. By providing a secure, user-friendly solution for self-custody, these devices enable individuals to truly own and control their digital assets in a way that aligns with the core principles of blockchain technology.

Moreover, the educational aspect of hardware wallet adoption shouldn't be underestimated. As Charles Guillimet notes, the process of setting up and using a hardware wallet provides valuable lessons in cryptocurrency management and security. This hands-on experience can help users develop a deeper understanding of blockchain technology and the importance of self-custody.

The Path Forward for Self-Custody and Blockchain Technology

As we look to the future of blockchain technology and cryptocurrency, it's clear that self-custody will remain a central principle. The challenges ahead - from improving scalability to enhancing user education and developing more user-friendly interfaces - are significant, but they also represent exciting opportunities for innovation.

The ongoing development of hardware wallet technology, combined with advancements in blockchain protocols and layer-2 solutions, promises to make self-custody more accessible and user-friendly than ever before. As the industry continues to mature, we can expect to see even greater emphasis on security, education, and user empowerment.

In conclusion, the conversation with Charles Guillimet underscores the critical importance of self-custody in the cryptocurrency space. As the industry continues to evolve and grow, the principles of self-sovereignty and true ownership enabled by self-custody will remain at the heart of the crypto revolution. Whether you're a seasoned crypto veteran or a newcomer to the space, understanding and embracing self-custody is key to fully participating in the transformative potential of blockchain technology.

Facts + Figures

• Ledger was founded in 2014, making it one of the oldest companies in the cryptocurrency space.
• Ledger devices have three main security properties: key generation inside a secure enclave, ensuring keys never leave the enclave, and a trusted display for transaction verification.
• Ledger supports over 150 different applications on its devices, most of which have been built by the community.
• The core module of Ledger devices remains closed-source due to security certification requirements from the smart card technology vendors.
• November 2022 was the biggest month ever for Ledger sales, following the collapse of FTX.
• Running a node on Solana is reportedly 1000 times more difficult than running a Bitcoin node.
• Ledger's business model includes revenue from hardware sales, financial services within Ledger Live, and an NFT marketplace.
• The company is exploring integrating their security technology more closely with smartphones to address the challenge of frequent transaction signing.
• Ledger is developing enterprise-level self-custody solutions to meet the needs of companies holding digital assets.
• The French blockchain ecosystem faces challenges due to complex administrative environments for startups and a cultural aversion to failure and risk-taking.

Questions Answered

What is self-custody in cryptocurrency?

Self-custody in cryptocurrency refers to the practice of holding and managing your own private keys, which are essential for accessing and transacting with your digital assets. It means you have complete control over your funds without relying on intermediaries or centralized institutions. Self-custody is considered a fundamental principle of cryptocurrency, aligning with the ideals of financial sovereignty and decentralization.

Why is self-custody important in crypto?

Self-custody is crucial in crypto because it embodies the core principles of blockchain technology: decentralization, security, and true ownership of assets. As Charles Guillimet emphasizes, "If you don't self-custody, you are just trading it as you would trade stocks on the regular market. But this is not the revolution that web 3 is about." Self-custody ensures that you have full control over your assets, reducing the risk of loss due to exchange hacks or bankruptcies, and aligning with the ethos of financial independence that cryptocurrency promotes.

What are the different types of cryptocurrency wallets?

Cryptocurrency wallets can be broadly categorized into software wallets, hardware wallets, hot wallets, and cold wallets. Software wallets are applications or browser extensions that store your private keys on your device. Hardware wallets, like those produced by Ledger, store private keys in a secure, offline environment. Hot wallets are frequently used and connected to the internet, while cold wallets are kept offline for long-term storage of large amounts of cryptocurrency. Each type offers different balances of security and convenience to suit various user needs.

How do hardware wallets enhance crypto security?

Hardware wallets enhance crypto security by storing private keys in a secure, offline environment, physically isolated from internet-connected devices. They typically feature a secure element (a type of chip designed for high-security applications) and a trusted display for transaction verification. As Charles Guillimet explains, "What makes really a hardware wallet secure is this, like the cryptography running the security pieces on a dedicated hardware, which is completely physically isolated from your computer." This isolation significantly reduces the risk of key theft through malware or hacking attempts.

What challenges does the blockchain industry face in terms of scalability?

The blockchain industry faces significant challenges in terms of scalability, particularly in achieving high transaction throughput while maintaining security and decentralization. As Charles Guillimet notes, "The blockchain we have today have a very low throughput and it's a big issue." The industry is exploring various solutions, including layer-2 technologies and new consensus mechanisms, to address these scalability issues. Balancing scalability with security and decentralization remains a key focus for blockchain developers and researchers.

How has the collapse of major exchanges affected self-custody adoption?

The collapse of major cryptocurrency exchanges like FTX in 2022 has significantly boosted interest in and adoption of self-custody solutions. Charles Guillimet reports that November 2022 was Ledger's biggest sales month ever, following the FTX collapse. These events have highlighted the risks of leaving assets on centralized exchanges and reinforced the importance of self-custody. While the immediate impact was devastating for many users, in the long run, these incidents have served to educate the crypto community about the importance of controlling their own private keys.

What role does user education play in crypto security?

User education plays a crucial role in crypto security. As Charles Guillimet points out, "The missing part is mostly education. Like people need is mostly like phishing or scams rather than real attacks." With technological solutions becoming increasingly sophisticated, human error and lack of understanding now pose the greatest risks to users' assets. Comprehensive educational initiatives are needed to teach users about best practices, common threats, and the fundamental principles of blockchain technology to enhance overall security and foster responsible adoption.

When is the right time to buy a hardware wallet?

According to Charles Guillimet, "The best time to buy a hardware wallet is now or maybe yesterday." He argues that the value of a hardware wallet isn't just in securing large amounts of cryptocurrency, but in the educational experience it provides. Using a hardware wallet helps users understand the principles of cryptocurrency ownership and management, making it a valuable tool even for those just starting out in the crypto space. Guillimet suggests that the lessons learned from using a hardware wallet are valuable regardless of the amount of crypto owned.

What is the future of blockchain technology and self-custody?

The future of blockchain technology and self-custody is likely to focus on improving scalability, enhancing user education, and developing more user-friendly interfaces. Innovations in layer-2 solutions, account abstraction, and integration with everyday devices like smartphones are expected to make self-custody more accessible and convenient. The industry will continue to grapple with balancing security, decentralization, and ease of use. As blockchain technology matures, self-custody is expected to remain a central principle, with ongoing efforts to make it more accessible and user-friendly for mass adoption.