![]() In response to stockbroker Peter Schiff tweeting that he lost access to all his bitcoin due to a corrupted wallet file, Vitalik Buterin commented on the need for better recovery methods: But this comes at the price of users having to secure their own private keys. In recent years, users have turned to self-custodial wallets that allow complete control over their funds. ![]() Since the platform holds the user’s private keys, they have authority over their coins. As the crypto adage goes, “not your keys, not your coins”. The downside for crypto natives was that the user technically does not own the funds they deposit on custodial wallets. If users forget their login credentials, they can reset their information through email or a phone OTP. Users on custodial wallet platforms like Coinbase access their funds through the traditional username and password. Their solution was straightforward: users should give up control of their private keys to the platform entirely for a more straightforward and intuitive wallet recovery method. Users safeguard these words using offline storage methods like paper but are fully responsible for their safekeeping.Īs the cryptocurrency’s potential caught the attention of a larger and less technical population, custodial wallets emerged to meet user needs. The seed value can be transformed into a mnemonic phrase containing twelve common English words to improve storability. If the user loses their private key, the seed value can be used to recover the keys. Hierarchical Deterministic (HD) wallets, introduced in 2012, offered the first practical recovery method: an initial seed value is used to generate subsequent private key values pseudorandomly. The early wallets, which were created for bitcoin aficionados, had limited recovery methods and relied on the user’s technical expertise to safely back up the private key. In this article, we explore some of the recovery methods that mitigate the risk of loss in self-custodial wallets, ranging from early methods around mnemonic phrases, to newer and more innovative methods which leverage Multi-Party Computation (MPC) and smart contract based Guardians. ![]() Think of it as a donation to everyone.” One person’s loss is everyone’s gain. In an early 2010 forum, Bitcoin founder Satoshi Nakamoto pitilessly discarded users’ concerns about irretrievable bitcoins, “lost coins only make everyone else’s coins worth slightly more. Unlike cash, which governments can controllably print based on economic needs, bitcoin’s supply is limited - it’s algorithmically capped at 21 million coins – which makes each coin valuable. Losing a crypto wallet’s private key, on the other hand, is dire and can render the funds permanently inaccessible. If a person drops some cash on the street, any fortunate onlooker can pick it up and purchase goods of equal value: one person’s loss is another’s gain.
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