Bitcoin introduces new custody solutions for holders to secure bitcoin in all kinds of ways. While standard single-signature wallets are the simple choice for most people, some prefer multi-signature (multisig) configurations to mitigate single points of failure.
Now, innovative solutions like collaborative custody build on multisig to make distributed security more accessible and reliable for the everyday Bitcoin holder.
The complexity of traditional multisig may prevent those from setting it up who may otherwise benefit from it, so collaborative custody solutions are crucial to providing a more guided outlet away from centralized custodians and towards truly secure, self-custodial bitcoin.
But first of all…
Here’s the Problem
Popular custody models for bitcoin today all come with inherent flaws:
- By leaving bitcoin with centralized custodians, you give up all of your rights to that bitcoin. Until you take self custody, that bitcoin is subject to all kinds of risk, such as exchange failures, online hacks, bankruptcy filings, or other criminal activity.
- Traditional multisig exposes your bitcoin to more points of risk and complexity that may otherwise hinder a setup that could’ve worked with singlesig security.
- Alternative methods like multi-party computation (MPC) wallets split the private key into multiple fragments, but you have to trust the service splitting the private key to not make copies of your private key prior to splitting.
The technical learning curve of multisig prevents many that could benefit from a blend of distributed custody, but up until recent years, there haven’t been any mainstream products offering to mitigate that risk for the user.
Enter collaborative custody.
What is Collaborative Custody?
Collaborative custody is a type of multisig setup where you share control of your bitcoin with a trusted third party, typically in a 2-of-3 arrangement. It contrasts with traditional DIY multisig, where you manage all keys yourself.
Collaborative custody helps to strike a balance of the client’s preference between individual autonomy and third-party oversight. It’s an adaptation that introduces greater flexibility for those looking to insure their Bitcoin holdings.
How Does Multisig Work?
In a multisig setup, there are typically two parties: signers and cosigners. A signer is somebody who initiates a transaction, while a cosigner is somebody who needs to approve the transaction before it broadcasts to the Bitcoin network.
To authorize a transaction, you need a certain number of signatures (m) out of the total number of signers and cosigners (n).
Let’s say that Alice, Bob, and Jon are long-time friends that live in different regions of the world.
They want to build a Bitcoin business together, so they combine their Bitcoin savings together and set up a 2-of-3 multisig wallet to secure and manage their joint funds.
Jon makes the mistake of storing his private key in his password manager on his computer, whereas Alice and Bob do the smart thing and stamp their seed phrases into metal and keep them somewhere safe.
While not paying any attention, a hacker cracks Jon’s password manager – which is not even close to as secure as bitcoin’s native SHA256 hashing algorithm – and reveals his private key.
If those keys only granted the thief access to a single-signature wallet, then Jon would’ve lost the Bitcoin stack entirely. But since they secured the bitcoin with multisig, the hacker won’t be able to get approval from the co-signers to send the bitcoin.
Standard Multisig Vs. Collaborative Custody
The primary difference between collaborative custody and multisig lies in key storage. Collaborative custody provides mechanisms for recovering funds even if a user loses a private key; something that standard multisig doesn’t inherently offer.
| Standard Multisig | Collaborative Custody | |
| Setup | Standard multisig follows a typical m-of-n configuration that requires multiple unique keyholders to manage private key security. | Utilizes multisig but involves a professional custody provider to help manage key distribution and user access. |
| Key Recovery | Keyholders are solely responsible for backup, recovery, and ongoing key management. Loss of keys can result in permanent loss of funds. | Professionals retain custody of one key, ensuring legal, robust, and redundant security protocols are in place to prevent total loss. |
| Risks | Private keys are more prone to accidental loss. If multiple keyholders lose their keys, and the number of available keys falls below the required ‘m’ threshold, then the bitcoin is lost forever. | Requires some tradeoff in privacy and trust by involving an outside third party; however, this can reduce operational risk. |
Working with collaborative custody providers can also give you professional access to other financial services that you may not have the know-how to take on yourself. If you prefer having professional guidance alongside your Bitcoin holdings, then collaborative custody gives you those perks that you may not get from close family/friends who are your keysigners.
How Collaborative Custody Builds On Multisig
Beyond ensuring that you can safely recover your bitcoin with multisig without having to rely on any single party, this opens the door for a full suite of Bitcoin products to offer for everyday people.
Many services have emerged in the market to provide these services: Unchained, Keeper, Nunchuk, and even personal consultants offer new off-ramps all around the world for people to take their bitcoin off of centralized exchanges into their own self custody. By choosing a collaborative custody setup, you can designate these services or other trusted parties as co-signers in your multisig setup.
Traditional multisig wallets can introduce a large technical barrier for many people who may not be as familiar with the Bitcoin protocol. Collaborative custody aims to streamline this user experience so that everyday people can set up safe and secure multisig custody setups with third parties of their own choosing while mitigating risk and keeping the process as simple as possible.
While it’s not ideal for privacy, collaborative custody makes bitcoin feel comfortable to newcomers and “closer to home” with traditional financial planning, such as estate planning, fraud monitoring, and more.
Bitcoin Insurance & Estate Planning
By entrusting a key (one, two, or more) with a professional co-signer, you can be sure that your bitcoin remains safe and accessible in the event that you become suddenly unavailable to sign with your private key, whether through death or other unforeseen circumstances.
Collaborative custody makes the transition process much easier. Along with one of the keys, the co-signer holds onto the wallet configuration file and can transfer the bitcoin to another wallet, with virtually no involvement from the beneficiary whatsoever.
Transaction & Fraud Monitoring (With Consent)
Bitcoin is all about having your say over your own money. Rather than subjecting your entire net worth to the KYC regime overseeing our transactions today, collaborative custody gives you choice over how much you let other co-signers see.
You can opt in to have them monitor your wallet through a watch-only xpub (extended public key) to detect fraud or other malicious activity, in case you prefer having someone keeping an eye on things in a safe, non-custodial way.
Additional Services
In case you want your collaborative co-singer to take care of other Bitcoin management for you, collaborative custody enables you to choose the level of access co-signers have over funds to enable safe management from others while still entirely under your own control.
Why Do We Need Collaborative Custody?
As emphasized, collaborative custody is all about choice.
What used to be a fully centralized monopoly on custodianship in the game of money is now broken ever since bitcoin arrived. Self custody is paramount to Bitcoin security; without the ability to take self custody, bitcoin would have no value.
By introducing a truly sovereign asset that you can hold yourself, bitcoin has introduced a brand new market of custody models for customers to choose from that simply were nonexistent previously.
You can choose to be fully self custodial, or choose to include additional co-signers for an added layer of security. The point being: people should truly have the right to their own money and dial in exactly how they want to secure it.
How can collaborative custody further abstract complexity away from the user? Consider the following collaborative custody setup.
- The client owns the bitcoin and holds one private key, managed simply through a mobile phone.
- The client stores the second key somewhere safe, whether that be with a trusted friend, advisor, or in a geographically-distributed location that’s easy or hard to access, depending on the client’s preference.
- A third-party institution manages the third key, legally backed by robust security protocols, and serves as a measure of last resort in case you lose your own key. You can get in contact with the institution and initiate recovery with professional support.
Risks To Keep In Mind With Collaborative Custody
- Privacy: The magic of bitcoin comes from the ability to take self custody, and while you still retain ownership when using collaborative custody, you do have to give up a certain level of privacy and autonomy over your bitcoin so that your collaborative signer has proper access. Your collaborative partner may need access to information such as your xpub or to participate in transaction signing—both of which can leak metadata about your holdings and activity. If maintaining total privacy is critical to you, this tradeoff may be unacceptable.
- Trust: You have to ensure that the parties you’re working with won’t censor/surveil without your consent, or become a failure point due to business collapse, regulatory capture, or malpractice. Proper custodian vetting is paramount to robust security when using collaborative custody.
Custody Model Tradeoffs
The silver lining is that you can determine how much access you choose to give to your collaborative signer:
- Client holds 2-of-3 keys: This is the ideal setup, as you retain full custody and say over your bitcoin. You can manage funds without permission, however, it does come with a greater level of personal responsibility as you must keep track of two keys. You can give one to someone else you trust to secure it, or store it somewhere safe, and preferably geographically distributed so that a thief can’t take both from you at once.
- Client holds 1-of-3 keys: You hold one key, and distribute the others to multiple custody providers. The big downside with this collaborative custody arrangement is that you now have to ask for permission to manage funds. If you want to send the bitcoin somewhere, CoinJoin it, or broadcast any other types of transactions, you need to get signatures from one of your other custody providers. It’s not exactly “permissionless” money any longer, but the positive to this arrangement, is that it removes some of the risk of managing two keys yourself, and prevents a total breakdown of your multisig arrangement in case one of the custodians fails and shuts down.
Critical warning: You should never give up control of all three (or however many) keys to third parties. At that point you are holding IOU bitcoin, which subjects your bitcoin to all the countless flawed, human security systems that just simply can’t compete with native bitcoin’s SHA256.
Remember, it’s all about optionality for the user. Certain collaborative custody may “compromise” the ethos of what makes bitcoin unique, but the fact remains that the mere existence of these new services speaks to the world bitcoin introduces: one where we get to make the decisions over our wealth, free from coercion by trusted financial institutions.
The Big Picture: Decentralizing Custodianship
Decentralized money works flawlessly; it’s the centralized holders of bitcoin that make mistakes.
Collaborative custody decentralizes control so that no matter the orientation, whether it’s 1-of-3, 2-of-3, 3-of-5, or some other arrangement, no single keyholder besides yourself ever has control over funds.
The big picture that bitcoin is revealing here is that we’re creating an enterprise layer of decentralized custodianship for Bitcoin holders all around the world where you don’t have to rely on any single company to keep your bitcoin safe.
In a blended world of bitcoin and fiat money, people need options to store their money in comfortable ways that safely onboards them to bitcoin. For those that prefer to have a helping hand from enterprises, collaborative custody serves as the bridge to make that happen while preventing the shortcomings that stem from centralized custodians.
Final Thoughts
Insuring your bitcoin with collaborative custody isn’t a difficult process. As mentioned, there are plenty of Bitcoin companies out there offering to handle the complexity and provide you with collaborative custody along with many other services to keep your bitcoin safe.
Choosing collaborative custody vs. multisig all comes down to your own personal preferences and determining what tradeoffs you’re willing to make. Traditional multisig may make more sense for private, distributed control, whereas collaborative custody can offer more guided, personal assistance to manage your bitcoin without ever losing custody over it.
To determine what’s right for you, be sure to read up on our other articles on Bitcoin custody, connect with Bitcoin communities online and offline to learn what works best for other bitcoiners, and most importantly: get your bitcoin off exchanges.
The sooner we usher in self custody for the world with more flexible solutions like collaborative custody, the sooner we can enjoy the benefits of hyperbitcoinization.
FAQs About Collaborative Custody
Q: How safe is collaborative custody?
A: Collaborative custody is very safe assuming you designate the right co-signers, however, no security system comes without its tradeoffs. If your bitcoin’s privacy is important to you, then collaborative custody may expose your bitcoin to counterparties more so than you’d like.
Q: Is collaborative custody right for me?
A: Collaborative may not be for everyone, depending on your counterparty tolerance. If you prefer privacy and don’t want anyone knowing about your bitcoin, then choosing to use a trusted company or other non-personal entity as a co-signer may not be right for you. With collaborative custody, however, you could designate two family members or friends who you trust with knowing you own bitcoin as co-signers so that you still remain relatively private while insured.
Q: How is collaborative custody different from traditional custodial solutions?
A: Collaborative custody allows holders to retain self custody over their bitcoin while introducing trusted parties to help manage its security. On the other hand, traditional custodial solutions like centralized exchanges or lending platforms hold the bitcoin for you, and use it in other (a lot of the times nefarious) ways to support their own business. Centralized custodianship introduces major security risk as you have no control in case of an emergency, so self custody via collaborative custody or traditional singlesig is always strongly recommended.
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