Expert Cryptocurrency Security: Self Custody Design Considerations (2024)

Athena Alpha

April 26, 2024

Designing, setting up and perfecting the cryptocurrency security of your own personal custody solution is a complex and multifaceted problem. Everyone has unique requirements, has unique technical capabilities, various available resources and circumstance so there are many different ways you can design and build them.

As the amount of funds being secured grows, so should the requirements around securing them. From a simple single signature Hardware Wallet setup, all the way up to Multisig Wallet setups that are geographically distributed over thousands of kilometers or have time delayed locking mechanisms in place.

At the same time it’s also important to ensure that the resulting solution isn’t overly complex and with so much security that it locks the owner out of their funds forever. While there are always extreme security situations such as kidnapping, evil maid attacks, stolen Hardware Wallets or the dreaded physical duress attacks, these should be carefully weighed up against the probability of them actually happening in real life, and the complexity of the custodial solution used to combat them.

A Three Part Series

For those that have a modest amount of funds or that are simply starting out, we recommend a single signature Hardware Wallet. This simple, but highly secure custody solution is an excellent starting point and is perfectly fine to secure your funds.

For the more advanced investors that are holding serious investments, we’ve written this three part series to help guide you through the full consideration, design and practical options that will ensure maximum security whilst not over complicating things.

In this first article we’re going to cover the main things you should consider when designing your own personal cryptocurrency custody solution. In successive articles we’ll dive into industry best practices and what your solution is recommended to have when it comes to storing serious investments.

Then finally we’ll be going through an example top tier level solution you can deploy yourself. This will be similar to what the big boys and girls use to custody billions of dollars of bitcoin and is based off hundreds of hours of research and investigation into some of the top custody solution standards out there.

Yes, these guides are for very, very serious investors!

Terminology

Before getting started on design considerations, we’d like to make it clear what we mean when we use certain terms. These are quite standardized across the Bitcoin industry, but for clarity and for those perhaps not already aware we thought we’d briefly go over them again:

Private Key (xPriv): A very large (256 bit), randomly generated number that represents a cryptographic Private Key that’s used to prove ownership and spend funds. This large, random number is converted into groups of 4 numbers sets which are then converted into a set of 12 or 24 words called a Mnemonic Sentence. While there are specific meanings for things like Extended Private Key, Seed Phrase, Mnemonic Sentence, Keys etc, they all get used to essentially mean the same thing
Public Key (xPub): While private keys are used to spend your funds, public keys are used to receive funds. Public keys are generated from the private keys and then from that public key a Bitcoin Address is generated. This is where the funds are then sent to in the Bitcoin network. Public keys can be shared with anyone, however sharing them can effect your privacy
Recovery Seed: A physical copy of your Mnemonic Sentence (the 12 or 24 words) usually either written down in pencil on laminated paper, or stamped into a metal seed plate for increased durability
Passphrase: A 13th or 25th word for the Mnemonic Sentence that is chosen by the user. This is generally not considered to be best practice to use for large funds as it creates a single point of failure. If used, they should be generated by a good source of entropy and be at least 20 characters or more long
Hardware Wallet (HW): A physical hardware device such as a COLDCARD Mk4 or BitBox02 that is used to generate and store your Private Key. They’re also used to sign transaction with the Private Key
PIN: A code used to protect your Hardware Wallet that is chosen by the user
Key Agent: A person or company that you involve in your custody solution to hold one of your Private Keys. They could be a specialized key storage company that charges a fee or a family member
Single Signature Wallet: A wallet that only requires 1 Private Key signature in order to authorize the spending of funds. It’s not recommended to use these for large fund amounts
Multisig Wallet: A wallet that requires multiple Private Key signatures in order to authorize the spending of funds. This takes the form of M-of-N, where you need M keys to sign out of a total of N keys. For example, you can have 2-of-3 multisig wallet where you have 3 keys, but only 2 are required to sign a transaction and spend funds. Note you also need a copy of the Wallet Output Descriptor file
Wallet Output Descriptor: Also called a Multisig Wallet Configuration File, it’s a piece of paper or digital file that contains the collections of output scripts used by a multisig wallet. This is used to tell your wallet software how to find your multisig addresses and to build the spend transaction. You must have this file along with the minimum number of signing keys (M) to spend funds in a multisig wallet
Vault: A name typically given to a custody solution that is meant for long term holding and storage of funds. Vaults are prioritized for safely storing funds at all expense and are usually multisig wallet setups with the Private Keys stored in geographically separate locations

With that formal terminology out of the way and everyone on the same page, let’s dive straight into all the various considerations you should be thinking about during the design process.