Transparent custody vs. Third party custody

[traderkhatz]

Transparency is the most important part of blockchain technology. Unfortunately, even though it has been upgrading all the time it still meets obstacles with security.

Every person, who keeps coins on a private wallet instead of exchange is afraid of losing them. If it happens there is no way to restore them and the user loses access to every fund that was stored there.

On the other hand, if you keep your coins/funds/money on the exchange you don't have access to your private keys. The wallet is under full control of the exchange and people who manage it.

And as my grandma used to say “ Not your keys, not your bitcoins”

Exchanges, where users don’t have access to their private keys, are called “Third-party custody”

As the results of such a solution, we now have witnessed several hacker attacks on exchanges that cost people money. It also opened a backdoor for market manipulation(Exchange has access to their users' coins/funds and may affect the price and the market).

Exchanges with Third-party custody

As I mentioned before, Third-party custody does not give access to private keys.

But…

It gives you a big advantage - you can restore access to your account in case of losing the password.

Also, it is comfortable in trading, your coins and funds are in one place which is easy to manage.

Yet… when the exchange goes bye-bye (under), your funds go bye-bye as well.

And here comes another important rule “ DO NOT KEEP YOUR COINS ON THE EXCHANGE”!

Exchanges with Transparent custody

Transparent custody wallet system gives you full control over your funds. The owner of the wallet is the only person who has access to his private keys and funds on the wallet and the exchange has only permission to use it when you trade. Your funds are safe but this system has issues, if you lose access to your wallet (lost password or deleted security files) you will never get them back. That’s why it is so important to keep your private keys in a secure place. A good number of this type of exchanges are coming to the rescue: BBOD and DIGITEX are good examples of transparent custody exchange.

Currently, 90%, (if not more) exchanges, are based on Third-party custody wallet system, which everyone probably knows. In my opinion, exchanges such as Binance, Bitbay, Bitmex etc. still can be robbed, and are unable to ensure the protection of users' data, will be a thing of the past.

In their places will come new exchanges who provide the “Transparent custody wallet system and ensure security".