Take Control of Your Bitcoin: Exploring Self-Custody Options

A Comprehensive Look at 7 Methods for Enhancing Single-Signature Bitcoin Security, and Why Multisig is the Superior Option for Long-Term Savings

Singlesig vs. Multisig Comparing Bitcoin Self-custody Methods

Not your keys, not your coins. If you want to remove custodial risk from your bitcoin holdings, taking self-custody is the way to go. But how exactly can you achieve self-custody? Well, the popular consensus is that hardware wallets are the most secure option out there. However, the choices don’t end there. In this article, we’ll dive deeper into the various options available for self-custody and compare them, so you can make an informed decision.

🔐 Singlesig: The Basic Option

Singlesignature (singlesig) is the oldest and most basic method of holding bitcoin. With singlesig, only one private key is required to sign off on spending bitcoin. It’s as simple as it gets. In fact, over 70% of the total bitcoin supply is held in singlesig wallets.

While singlesig is easy to set up and use, it does come with risks. Since there’s only one key, losing or misplacing it means losing access to your bitcoin. And if your key falls into the wrong hands, say hello to a thief enjoying your hard-earned coins. It’s like misplacing the only key to your fancy sports car or entrusting it to someone with a history of traffic violations. Not a good idea!

To avoid potential disasters, some people have come up with improvised modifications to enhance singlesig security. These include making copies of the seed phrase, splitting the seed phrase into separate pieces, encoding the seed phrase, or creating multiple singlesig wallets to distribute wealth. But are they effective?

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📝 Seed phrase copying

Making copies of your seed phrase is one way to protect yourself against natural disasters or misplacement. It’s like having spare keys to your house or storing backups of your important files. If one location is destroyed, you still have access to your seed phrase information.

However, the downside is that if a dishonest person finds any one of your seed phrase copies, they can steal your bitcoin. It’s like leaving a copy of your house keys in an obvious hiding spot, thinking nobody will find it. Not the best security strategy.

📝 Seed phrase splitting

Splitting your seed phrase into sections and storing them separately might seem like a clever idea. After all, if a thief acquires only a portion of the word list, they won’t be able to steal your bitcoin. Sounds secure, right?

Wrong. This approach is flawed. If a thief finds even a part of your seed phrase, they could be dangerously close to guessing the remaining words. Plus, losing any one of the seed phrase sections means losing access to your bitcoin forever. It’s like tearing a map into four pieces, losing one, and hoping you’ll still find the buried treasure.

📝 Seed phrase encoding

Encoding your seed phrase might seem like a foolproof way to keep it safe. By using secret formulas or hiding it within a larger set of words, it’s like disguising your seed phrase in plain sight.

But remember, the more complex the encoding, the higher the chances of making a mistake or forgetting how to decode it. It’s like creating a complicated puzzle for yourself and losing the instructions. Not the most reliable strategy.

📝 Multiple singlesig wallets

The classic “don’t put all your eggs in one basket” advice applies here too. By spreading your bitcoin across multiple singlesig wallets, you reduce the risk of losing everything or falling victim to a thief.

However, this strategy comes with added complexity and creates more single points of failure for substantial portions of your wealth. Losing access to one wallet means losing a chunk of your bitcoin. It’s like hiding your eggs in different places, but forgetting where some of them are stored. Good luck finding those missing eggs!

🛠️ Standardized Solutions: BIP 39 Passphrases, Seed XOR, and Shamir’s Secret Sharing

Apart from improvised modifications, there are standardized tools available to enhance singlesig security. These include BIP 39 passphrases, Seed XOR, and Shamir’s secret sharing.

📝 BIP 39 Passphrases

Introduced in 2013 as a part of BIP39, BIP 39 passphrases add an extra layer of security to your seed phrase. If someone wants to access your bitcoin, they’ll need both the seed phrase and the passphrase.

While this method offers resistance to theft without the risk of seed phrase splitting, it also poses a challenge. If you lose or forget your passphrase, you’ll be locked out of your funds. Like forgetting the password to your email account and never being able to retrieve your important messages. Choose a strong passphrase, but don’t forget it!

📝 Seed XOR

Coinkite, the creators of the Coldcard hardware wallet, introduced Seed XOR. This technology splits your seed phrase into multiple unique seed phrases. Each component must be recombined to reproduce the original seed phrase.

Seed XOR offers similar benefits to seed phrase splitting, but without the associated security risks. Storing the resulting seed phrases separately provides an added layer of protection. It’s like splitting a top-secret document into several pieces and making sure each piece is locked securely. A thief would need to gather all the pieces to uncover the secret.

📝 Shamir’s Secret Sharing

In 1979, cryptographer Adi Shamir developed Shamir’s secret sharing (SSS). It takes a secret (like a bitcoin private key) and generates multiple shares. But here’s the crucial difference: only a portion of the shares is needed to reproduce the original secret.

With SSS, even if a thief finds one of the shares, they won’t be able to access the funds in the wallet. This method offers resistance to theft without increasing the risk of loss. Losing a share doesn’t mean losing your bitcoin. It’s like dividing a treasure map among your trustworthy crew. When they work together, they can find the treasure, but a single map won’t lead them anywhere.

💪 Multisig: The Ultimate Protection

Finally, we have multisignature (multisig) wallets—a fundamentally different way to hold bitcoin. With multisig, multiple unique keys are required to sign off on spending bitcoin. You can define how many keys are necessary (a quorum). For example, a 2-of-3 multisig wallet requires two keys out of three to sign a transaction.

Multisig eliminates single points of failure and provides robust security for your bitcoin. It’s like having a security team that needs a majority vote to authorize access to your vault. Even if one key is lost or compromised, your bitcoin remains safe. A thief would need multiple keys to even attempt a heist.

😢 Trade-offs: Inconvenience and Fees

The downside of multisig is the inconvenience it brings. Transactions involving multisig require more effort from the user. And historically, multisig transactions have had higher fees than singlesig transactions. However, with the recent activation of the Taproot soft-fork, this difference may level out. Increased Taproot adoption could bring equal fee structures for both singlesig and multisig transactions.

👥 DIY vs. Collaborative Custody

Setting up a multisig wallet on your own can be challenging, especially without reliable technical support. Managing multiple keys and keeping track of wallet configurations might overwhelm newcomers to bitcoin. That’s where multisig collaborative custody businesses like Unchained Capital come in.

Collaborative custody offers the benefits of multisig while providing educational support, streamlined inheritance, and access to other financial services. With collaborative custody, you remain in full control of your bitcoin, but with a helping hand to navigate the complex world of multisig.

🤔 Should I Choose Singlesig or Multisig?

As you can see, every approach to self-custody has trade-offs. There’s no one-size-fits-all solution. But here’s a thought: why not combine singlesig and multisig? Use a multisig wallet for high-security, long-term bitcoin savings and a singlesig wallet for day-to-day transactions.

In the end, it’s all about finding the right balance between security and convenience. If you’re interested in multisig collaborative custody, where you have full control over your bitcoin and access to technical support, Unchained Capital is here to help.

So, take control of your bitcoin, explore the options, and make an informed decision. If you have more questions or want to dive deeper into the world of self-custody, book a free consultation with the Unchained team!

Originally published on Unchained.com.

Unchained Capital is the official US Collaborative Custody partner of Bitcoin Magazine and an integral sponsor of related content published through Bitcoin Magazine.

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📚 References: 1. Unchained.com – Original Article 2. Bitcoin Magazine – Multisig Guide 3. Bitcoin Magazine – Collaborative Custody 4. SLIP 39 – Shamir Backup 5. Unchained Capital – Book a Free Consultation

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💡 Q&A:

Q: Is self-custody the only way to protect my bitcoin? A: While self-custody offers the highest level of control and security, there are other options like custodial services or exchanges. However, keep in mind that when you don’t hold the keys, you’re relying on someone else to protect your bitcoin.

Q: Why are hardware wallets the most secure option? A: Hardware wallets are specifically designed to store private keys securely and are isolated from online threats. They provide an extra layer of protection through features like secure chip technology and PIN authentication.

Q: Can I use a combination of seed phrase copying and seed XOR? A: Yes, you can use multiple methods to enhance your security. Making copies of your seed phrase and splitting it using Seed XOR can offer added protection against different risks. Just remember to keep them safe and remember where you stored them!

Q: Can I share my seed phrase with family members for inheritance purposes? A: It’s generally not recommended to share your seed phrase directly with others, even for inheritance purposes. Instead, consider using a multisig collaborative custody solution like Unchained Capital, which offers streamlined inheritance processes.

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