Parth: Based on your experience, how has the landscape of self-custodial wallets changed over the last 5 years?
Jameson: The variety of wallets has certainly exploded. There were very few mobile app wallets 5 years ago and even fewer hardware key managers. Back then, most wallets were built by nerdy enthusiasts for nerdy enthusiasts - they tended to have many advanced options for power users. Today there are also plenty of trimmed down wallets that offer a simpler and cleaner user experience.
Parth: What trends do you see in the custody of wallet in the next few years? Will more people continue to move away from centralized custodians and take ownership of their coins?
Jameson: I still expect that custodial providers will retain most new users for the foreseeable future - the overwhelming majority of people will acquire their bitcoin through a custodian and only a fraction of them will take the next step to withdraw funds to a self-custody wallet. If you survey the landscape of wallet software, you'll note that there are 3 custodial wallets for every self-custody wallet. They also have the advantage of offering the simplest user experience because they can abstract away many of the complexities of wallet management to the server side of the custodian.
Parth: Is self-custody inevitable in your view?
Jameson: It's far from inevitable - it's actually an uphill battle. There are many similarities between achieving a higher level of security through self-custody and achieving a higher level of privacy by implementing tools and best practices. Because third party custody is the default for anyone buying through an exchange, it's difficult to get them to take more effort to learn why and how to withdraw to self-custody. I am hopeful that this tide will change as more users are onboarded to the system by earning bitcoin directly rather than exchanging fiat for it.
Parth: What factors should one consider before choosing a self-custody wallet/solution?
Jameson: First you must decide what you want to use the wallet for - is it small amounts that you may spend regularly or are you looking to secure large amounts that are spent rarely? This will help you make decisions about the convenience and security trade-offs you desire. If you're looking for a pocket money / frequent spending wallet then you'll likely want a mobile wallet that keeps the keys on the phone and probably has lightning network support. If you're looking to secure larger amounts, then you'll definitely want software that supports keeping the keys on a dedicated hardware device; for even more security and robustness then you'll want wallet software that supports creating multisignature setups. But most importantly, you'll want a wallet that you're comfortable using - there's no harm in testing out a bunch of different wallets to see which one suits you the best.
Parth: Can a self-custody wallet provider access my funds?
Jameson: We define self-custody as any setup whereby the wallet provider never has enough key material to unilaterally spend funds or unilaterally prevent funds from being spent. While some self-custody wallet services have the ability to view your funds, by definition they cannot have the ability to spend them.
Parth: How can we enhance the user experience of ‘hodling’ crypto for a grandparent who wants to store bitcoin?
Jameson: I think that systems of shared self-custody can play an important role here. If a less sophisticated family member wants to hold their own keys, you can create a model where other family members need to co-sign transactions before they can be sent. This enforces a system of robust checks and balances that prevents loss / theft / social engineering if grandma makes a mistake.
The views expressed by Mr. Lopp are solely his own and are not necessarily those of Fidelity Center for Applied Technology, Fidelity Labs, or any of their affiliates.