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decentralised finance > 05_Digital Asset Custody > Flashcards

05_Digital Asset Custody Flashcards

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1
Q

Reasons for Loss of Crypto Assets

A
  • sent to invalid addresses
  • stuck in wallets with lost keys
  • loss of physical wallet
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2
Q

Evolution of Custody Technology

A
  • safes
  • commercialization of safe deposit boxes that could be billed (20th century)
  • increasing security requirements due to growth of data volume (21st century)
  • new era of digital storage with invention of blockchain (secure storage of keys)
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3
Q

Role of traditional banks

A
  • saving & deposit
  • lending & financial advice
  • physical network & services
  • traditional assets
  • centralized structure
  • insurance and coverage
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4
Q

Role of digital asset custodian

A
  • cryptocurrencies and other digital assets
  • decentralized structure
  • mostly only
  • blockchain settlements
  • technical knowledge & maintenance
  • insurance but no coverage
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5
Q

What is wallet

A
  • wallets are digital, limited physical existence
  • technically do not store crypto
  • holdings live on blockchain, accessed using your **private key **
  • crypto wallets store your private keys safe and accessible
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6
Q

Digital Asset Wallet

aka Crypto Wallets / Hot Wallet

A
  • secure digital vault
  • storage & transaction tool
  • multi-currency support
  • interact with blockchain
  • public &** private keys**
  • access & control over assets
  • security and privacy
  • backup and recover
  • easy to trade assets

e.g. Metamask, Phantom, Trust Wallet

when connected to internet subject to hacking, cyberattacks etc.

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7
Q

Types of Wallets

A
  • Digital Asset Wallet
  • Cold Wallet
  • Hardware Security Module (HSM)
  • Warm Wallet
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8
Q

Cold Wallet

2 overarching

A

Hardware Wallet
- offline air gapped -> no direct vulnerability to hacks
- Risk of losing your holdings (loss of wallet)
- can be costly
- no instant access to holdings -> transfer of assets is time intensive & requires connection to network

Paper Wallet
- key is written on piece of paper
- store at secure location
- use of funds difficult -> digital mone can only be used on internet

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9
Q

Hardware Security module (HSM)

A
  • physical device designed to be tamper-resistant and tamper-evident
  • multiple physical measures that safeguard and manage digital keys
  • facilitates encryption, decryption, signing and verification
  • private key is generated within HSM
  • private key is never exposed -> cannot be copied or hacked
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10
Q

Warm Wallet

A
  • software / mobile wallet
  • form of digital storage that can be accessed through a computer or phone
  • often used to interact with DeFi applications, NFTs or exchanges
  • always connected to internet -> vulnerable to hacking or phishing attacks
  • allows for instanteous transfer of funds
  • vulnerable to government regulations -> if governments bans crypto, your warm wallet funds can be seized
  • often available for free
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11
Q

Private Key
vs
Public Key

Cryptographic Key Pair is the hear of this technology

A

Private key
- very large random number

Public key
- can be derived from the private key, but not vice versa

Wallet address
- public key is hashed to create a wallet address -> more convenient

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12
Q

Key Generation of Private & Public Key

A
  1. Random Number Selection
  2. Elliptic Curve Cryptography (ECC): private key is inputted into an elliptic curve multiplicaiton formula
  3. Public key generation: coordinates of second point on curve represent public key
  4. Hashing: public key is hashed using SHA256 algorithm, producing shorter, 160-bit hash
  5. Wallet Import Format: the private key can be converted into a wallet import format for importing & exporting ease of use
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13
Q

Bitcoin Transaction process

A
  1. Formulate Transaction
  2. Build Transaction message
  3. Sign Transaction
  4. Broadcast Transaction
  5. Transaction into Memory Pool
  6. Nodes Validate & receive rewards
  7. Block added to Blockchain
  8. Confirmation and validation
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14
Q

Wallet recover - seed phrase

A
  • series of words (12-24)
  • seed phrase like master password
  • access to seed phrase = access to wallet
  • seed phrase unlike private key
  • private key allows to sign transaction
  • seed phrase = access to wallet and all private keys in wallet
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15
Q

Attack Vectors

on private key

A
  • brute force attacks: guessing private key with excessive testing
  • implementation flaws: errors in programming exploited by hackers
  • backdors: secretly embedded master-keys that defy algorithm known by only few
  • quantum computing: brute forcing on steroids
  • human errors: loss or theft of private keys
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16
Q

Definition
Multi Party Computation (MPC)

A
  • Share responsibility: splits private key data among parties, eliminating single points of failure
  • Secure Computations: Parties compute on their key share, results are combined for the oepration without revealing the full key
  • Distributed Transactions: txs are real-time and key shares can be geographically spread
  • Flexible Access Control: allows subset of parties to approve transaction
  • No Single key: each party holds a key share, and they collaborate to sign txs
  • Enhanced Security: MPC avoids assembling full private key, minimizing attack surface
  • Resilience: MPC resist external hacks and internal collusion, as all parties would need to be compromised
  • Privacy Preserving: MPC enables computations on private data without exposing it
17
Q
  1. Hardware Wallet
  2. Software Wallet
  3. Web Wallet
  4. Custodial Wallet

Description

A
  1. **Hardware devices **specifically built to store public-private key pairs
  2. application installed on a device, such as a smartphone or computer
  3. accessed through an internet browser, quick transactions and high availability
  4. Wallet infrastructure for securing public-private key pair
18
Q
  1. Hardware Wallet
  2. Software Wallet
  3. Web Wallet
  4. Custodial Wallet

Connectivity

A
  1. Cold
  2. Cold or Warm
  3. Warm
  4. Cold or Warm
19
Q
  1. Hardware Wallet
  2. Software Wallet
  3. Web Wallet
  4. Custodial Wallet

Security

A
  1. High
  2. Medium
  3. Low
  4. High
20
Q
  1. Hardware Wallet
  2. Software Wallet
  3. Web Wallet
  4. Custodial Wallet

Ease of Use, Regulation + Liability

A
  1. Medium; not regulated; user liability
  2. high; not regulated; user liability
  3. high; not regulated; user liability
  4. Depends on custodian; regulated; provider liability
21
Q

Pros of Exchange hosted wallet
Centralized Custody

opposed to decentralized custody

A
  • easy entry for investors without background knwoeldge
  • high convenience and operability
  • user maintains access via an online app / dashboard / website
22
Q

**Cons of Exchange hosted wallet **
Centralized Custody

as opposed to decentralized custody

A
  • huge counterparty risks with exchange
  • security risk (exchange hacks)
  • mixing of clients assets and no clear separation
  • exchange has control and management of public and private keys
  • need for on-chain transfers in times of high volatility across exchanges
  • potential rehypothecation of client assets
23
Q

Pros of Third-party custody
Centralized Custody

A

stores digital assets on behalf of clients without necessary expertise
- specialized on safekeeping of assets
- institutional-grade tech and security
- clear transparency with publicity of public keys
- liability transfer to custodian
- handles burden of managing a complex technology stack
- regulatory compliance

24
Q

Cons of Third-party Custody
Centralized Custody

A

high level of coordination between custodian and customer required to set up
- fees involved for the service of safekeeping and liability coverage
- counterparty risk still exists being exposed to potential hacks
- not a viable option for private / retail clients

e.g. Hauck Aufhäuser Lampe, Finoa

25
Q

Pros of Decentralized Custody

A

highest security standards with self custody
- includes hot, warm, and/or cold wallets / stores
- enables complete self-suffiency and 100% control over digital assets
- supports a wide range of protocols, currencies and tokens

26
Q

Const of decentralized custody

A

high personal responsibility!!
- assets becom irretrievable when access to assets is lost
- high responsibility for assets, asset management, and associated risks
- requires expertise in digital assets

e.g Ledger Nano x (hard), Metamask, unstoppable finance (web wallet)

26
Q
A
27
Q

Summary of Pros and Cons of
1. Self-custody
2. exchange wallets
3. third-party custodian

A

1. Self Custody
Pros:
- relatively secure
- greater control

*Cons: *
- responsibility for asset
- more susceptible to hacking or loss of assets

2. Exchange Wallets
Pros
- Simple
- ease of access
- cheap

Cons
- counterpaty risk
- comingling

3. 3rd Party Custodian
Pros
- clearly defined rules
- adjustability
- more secure, likely insured and regulated

Cost for retail use

28
Q

Why do we need regulation?

A
  • regulatory initiatives lower barriers to market entry
  • institutios need more security and clarity
  • helps healthy and sustainable market growth
  • protection against fraud and criminal activities for consumer
29
Q

MiCA

Markets in Crypto Assets

A
  • unified legal framework in the EU
  • investor and consumer protection
  • promotion of innovation and fair competition
  • definition of crypto assets as a digital representation of a value or right
  • differentation: asset-referenced tokes, e-money tokes and utility tokens (obligation to create and publish a white paper)
  • rules on liability under civil law in event of misleading or incomplete white papers, including possible claims for damages
  • authorization requirement for the issuance of crypto assets
30
Q

Tangany Suite
Solution

A

1. digital asset core system
- self-developed cloud system
- highest level of security
- API-first approach
- modular and flexible
2. licensed freamwork
- BaFin regulate and audited
- custody and registrar license
- leveraging of our licenses
- 360 degree digital asset issuance

3. White Label
- seamless integration via API
- stay face to the customer
- 100% IT compatibility
- individual frontend

31
Q

Tangancy Core System for Digital Assets

A

1. Custody API: omnibus and segregated wallet architecture
2. Customers API: manage users, KYC sharing
3. Settlement API: Accounting system for digital assets, track user balance

  1. Managed Wallets
  2. Crypto Security Registrar
  3. Earn (Staking & Landing)
32
Q

Industries of Tangany Solution

A
  • institutions
  • neobroker
  • corporations
  • FinTech
  • Asset Manager & Funds
33
Q

Tangany Case Study
Tokenization of Real Estate Assets

A

Challenge
- traditional financial infrastructure for real estate investments from $1 would have been too expensive and restrictive for customers

Solution
- real estate is digitzed / tokenized and stored on blockchain
- cost reduction of 65% compared to alternative
- owners of tokenized real estate can trade it 24/7

34
Q

Tangany Case Study
NFTS / Web3 Application

A

Challenge
- more than 20 PC games were to be equipped with NFTs and tokes and connected to their own blockchains
- blockchain to oeprate invisibly in background

Solution
- millions of wallets were invisibly assigned to players
- game content was tokenized using NFT and transferred to players
- they can now generate welath by playing computer games

decentralised finance (11 decks)

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