🔒 Custody & Security: Your Keys vs Their Vault
Learn about self-custody risk vs counterparty risk
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0 / 5 completed🔐 Who Controls Your Funds?
The custody model is the most critical difference between DEXs and CEXs. It determines who holds your private keys—and therefore, who truly owns your crypto.
🎮 Interactive: Custody Model Explorer
Understand how each model handles your funds:
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DEX (Self-Custody)
You control your private keys at all times
User Flow
👛
Create Wallet
Generate wallet (MetaMask, Ledger)
📝
Secure Seed Phrase
Write down 12-24 word recovery phrase
🔗
Connect to DEX
Approve connection, funds stay in wallet
✅
Trade Directly
Sign transactions, settle on-chain
Security Responsibility
You are responsible for securing your keys
⚠️ Risks
- • Lost seed phrase = lost funds forever
- • Phishing attacks
- • Malicious contracts
- • No customer support
🛡️ Protections
- • Hardware wallets
- • Multisig
- • Contract audits
- • Test transactions
🎮 Interactive: Security Crisis Scenarios
Explore real-world security failures and their consequences:
🚨
Exchange Hack (CEX Risk)
Hackers exploit exchange security vulnerabilities and drain hot wallets
Real Example: Mt. Gox (2014)
Timeline of Events
1
Discovery
Exchange detects unauthorized withdrawals
Pause withdrawals
2
Investigation
Extent of breach determined
850,000 BTC stolen (~$450M)
3
Aftermath
Exchange declares bankruptcy
Users wait years for recovery
4
Recovery
Partial recovery through creditor process
~20% returned after 10 years
Key Lesson
Custodial risk: When exchange holds keys, hacks affect all users
🛡️ How to Protect Yourself
Only keep trading amounts on CEXs. Store bulk in self-custody.
The Famous Saying
🔑
"Not your keys, not your coins"
— Bitcoin Community Maxim
This phrase captures the fundamental security trade-off in crypto. When you deposit funds on a CEX, you're trusting them to:
- • Secure the private keys properly
- • Not misuse your funds (FTX-style)
- • Process withdrawals when requested
- • Maintain solvency and avoid bankruptcy
DEXs eliminate this trust requirement by letting you trade directly from your wallet. But this comes with its own responsibility—you must secure your own keys.
💡
Best Practices for Both Models
DEX (Self-Custody)
- • Use hardware wallets (Ledger, Trezor)
- • Store seed phrase offline, multiple locations
- • Test with small amounts first
- • Revoke unused token approvals
- • Verify contract addresses
- • Use separate wallets for DeFi vs holdings
CEX (Custodial)
- • Enable 2FA (authenticator, not SMS)
- • Whitelist withdrawal addresses
- • Only keep trading amounts on exchange
- • Verify proof of reserves if available
- • Diversify across multiple exchanges
- • Withdraw to self-custody regularly