Breaking down the meaning of "Self-Custody" within the NFT ecosystem.
Recently there have been several incidents within the crypto industry where institutions went bankrupt, became insolvent, or blatantly scammed their customers. The most notable event was the collapse of a major crypto exchange called FTX. Billions of dollars of customer assets were impacted, but it’s important to remember that this was not a case of decentralization failing… FTX was a centralized crypto trading platform. The crypto ecosystem is comprised of both decentralized and centralized entities, and the latest breaches of trust occurred within centralized parties who were acting as custodians for users. These failures are a stark reminder of why self-custody is so powerful and important, especially for artists. But what is self-custody exactly?
If you’re an artist or creator who makes NFTs, then you’re most likely already practicing self-custody whether you realize it or not. That being said, if you don’t adequately understand the decentralized and self-custodial practices undergirding the NFT ecosystem, then you won’t be able to navigate it effectively or support your collector base the way they deserve.
By understanding self-custody fully, you as an artist will be able to take control over your destiny, up your NFT game, and improve the experience you provide to your collectors.
According to Oxford Languages, the word “custody” refers to “the protective care or guardianship of someone or something”; it’s derived from a Latin word that referred to a watchman. Most people are familiar with the term “custody” in relation to child custody or law enforcement, but it’s especially pertinent to our financial lives. If you have fiat currency held in a bank account or investment account, then you have given custody of those assets to a financial institution.
People relinquish custody of their assets for a variety of reasons, the primary ones being convenience and security. Sadly, there can be many downsides to doing this though… you run the risk of the institution breaking your trust through fees, delays, wait times, restrictions, and even frozen funds. All of these downsides are what lead many people to practice self-custody.
In the simplest of terms, Self-Custody is the practice of holding your assets yourself. You are fully responsible for them and in control… for better or worse.
Self-Custody has become increasingly popular with the rise of blockchain technology which has enabled new, more efficient ways of practicing self-custody through the power of cryptographic digital wallets. It’s never been easier!
At the heart of all custodial relationships though, even self-custodial ones, lies a web of trust. You’re either trusting yourself or someone else. You’re also trusting the technology that undergirds the whole thing.
When it comes to NFTs, the vast majority are held via self-custody in personal crypto wallets. This is due to the fact that there are very few institutions that offer NFT custody services as of yet, and most of the early adopters in the ecosystem prefer self-custody to begin with because they want to avoid becoming a victim of an institution like FTX.
As an artist, the reality of self-custody means that you and your collectors have a larger level of personal responsibility in the realm of NFTs than exists in the traditional financial world. This might change in the more distant future, but for now you’ll need to be good at self-custody in order to succeed with NFTs.
Now that we understand what Self-Custody means, let’s explore what it looks like practically for artists and creators. In a future blog post, we’ll guide you through all of the specific details for how to navigate these things practically.
When practicing self-custody, you don’t have the benefit of relying upon the security teams and regulatory processes that major financial institutions have in place to protect their customers. Instead, you have to implement your own security practices and continue to maintain them into the future.
In the world of NFTs, there are many different things you have to ensure are secure:
Many artists who mint NFTs may know that they need to keep their secret phrase secure, but they might not realize how complicated it is to actually do so. For instance, if you write it down on paper, what happens if your house burns down? If you store it on metal in a fireproof box, what happens if someone steals the box or breaks into your home? Is it enough to keep one copy of a secret phrase? Does creating multiple copies increase your odds of it falling into the wrong hands?
Issues like this can be critically important if you find your art career progressing and your fan base growing. If one of your devices or secure locations is compromised, a bad actor could steal NFTs, mint new ones from your wallet, scam your collectors, or worse. Any and all of these things could damage your reputation and make it difficult for people to trust that your art is worth collecting.
In a traditional custodial relationship with a bank, you have a lot of privacy guarantees built in — but when it comes to NFTs and crypto, sensitive information about your finances or NFT drops might be leaked unintentionally if you don’t know what you’re doing.
Whenever you mint new NFTs, the address of the wallet you used will become permanently associated with the NFTs. This means that any of your NFT collectors could be aware of your “minting address”. Because most blockchain data is public and fully transparent, anyone can take your wallet address and find out what assets it contains, as well as a full log of every transaction it has ever made… including what other wallet addresses it might be associated with.
The good news is that wallet addresses only become tied to your name/identity when you either choose to do so or accidentally do so. This means that you have a lot of control, but you’ll have to be intentional about it and safeguard yourself against mistakes. Let’s consider a real-world scenario to better illustrate the privacy implications of self-custody for NFT artists…
Samantha is a fine artist who makes generative art and interactive NFTs. She has developed a base of collectors and fans, and there is actual demand for her art on the primary and secondary market. Her new NFT drops sell out quickly, and many people compete to acquire her work. She has an ambitious art project releasing in a few weeks, but she wants it to be a surprise. In the weeks leading up to the release, Samantha beings to create the smart contracts and NFTs to prepare for the public sale. If she creates these new NFTs and smart contracts using the same wallet she’s accustomed to using, then it’s possible that a fan or collector could notice her activity on the blockchain and spoil the surprise… which could lead to undesirable effects on the market and demand. She could create a new wallet address, but she would need to make sure she doesn’t fund the wallet from any of her currently known addresses that could be traced back to her.
This is just one of the many different kinds of privacy scenarios that might arise in the life of an artist who makes NFTs.
Another angle to consider when it comes to NFT self-custody is the role data storage plays for both you and your collectors. Unfortunately, it’s not enough to simply create an NFT and assume that your collectors and fans can have a guarantee that they meaningfully own their asset.
For most NFTs, there’s usually two components… the token on the blockchain that represents the work of art, and then the work of art itself. If you don’t use a decentralized storage method like IPFS and Filecoin, then many potential collectors will not feel safe buying your work. Even though they might own the token on the blockchain thanks to the power of self-custody, there’s still the added layer of trust when it comes to where the related art media itself is stored.
Collectors wants to know that no matter what happens, they’ll still have access to the original media associated with their NFTs. That’s where solutions like NFT.Storage come in… we help artists store NFT data in a secure and decentralized fashion that is now trusted by the biggest names in NFTs like OpenSea and Magic Eden. When you store with us, most collectors will feel assured that they are in good hands.
In an upcoming blog post, we’ll guide you through exactly how to stay safe while minting NFTs and building a collector base. You’ll walk away with all the skills and knowledge needed to cover both your privacy, security, and data storage angles! Sign up to our email list and follow us on Twitter to stay in the loop and to receive helpful resources about navigating the world of NFTs!