Self-custody costs money

We often talk about holding your own keys like it doesn't cost anything. This isn't true.
I don't think individuals are generally stupid. So if many of them are doing something (using a custodian), I wonder if they have a good reason.1
Maybe the reason so many people use things like Wallet of Satoshi or leave their bitcoin on an exchange is that they think it's cheaper than self-custody.

How much does custody cost?

Costs of onchain self-custody
  • Transaction fees
  • Educating yourself on best practices
  • Running a node
  • Risk of theft or loss through user error
Costs of using an onchain custodian
  • Rug risk: you could lose everything
  • KYC/AML compliance
  • Transaction fees
  • Lack of convenience
  • Lack of privacy
From this rough comparison it seems that onchain self-custody may not be free, but it is cheaper than giving up custody.
Many custodians pass transaction fees on to their customers or force you to wait on their convenience to make a transaction. Custodians massively increase your exposure to attacks through database leaks or bad actors inside the company and because they often compel you to report identity and amounts to governments. I don't see any case2 where it is cheaper for an individual to use a custodian than it is for them to hold the keys themselves.

Is custody cheaper for Lightning?

Costs of lightning self-custody
  • Locking up liquidity
  • Convincing someone else to lock up liquidity
  • Running a lightning node
  • Paying attention
  • Channel setup/close fees
  • Rebalancing fees
  • Routing fees
Costs of using a lightning custodian
  • Rug risk: you could lose everything
  • KYC/AML compliance
  • Transaction fees sweeping to onchain
  • Routing fees
  • Lack of privacy
  • uxto bloat in your onchain wallet3
If you use a custodian for lightning, you don't have to manage a node and you don't have to manage liquidity. You receive when you want and you send when you want, no sweat. However, there is the risk that you will be rugged/shotgun kyc'd or otherwise curtailed in your use of your bitcoin. This risk is probably4 the biggest cost of using lightning with a custodian. But it seems clear that, while lightning transaction fees may be lower than on chain, it costs more to be self-custodial. I can't tell if using a lightning custodian is cheaper than being self-custodial.

The Moral

Transaction costs are not the only costs associated with a given layer-2. It is also important to think about how much it costs to be self-custodial. This was a bit of a revelation for me.

Footnotes

  1. It is possible that I have recreated an individual version of the efficient market hypothesis which is bunk, so let's add that people can be mistaken and might not have full information.
  2. Perhaps the Uncle Jim situation is an exception: granny giving her keys to her grandson might make sense.
  3. Presumably, there is some number of sats, over which the risk of a rugpull is simply too large for most people to accept. We probably all have a different number, but the lower bound of this number is based on the perceived useful size of a utxo. EXAMPLE: if you think 100k sats is all that you will trust to a custodian, any time you near this limit, you might transfer out of the custodian to a wallet you control. If this is an onchain wallet, you will be creating a bunch of 100k or less utxos for yourself. (If you are transferring out to a self-custodial lightning wallet, I'm curious why you were also using a custodial one). Therefore, if your limit is too low (eg. you are only willing to trust a custodian with 25k sats) you effectively prevent yourself from using the custodian at all.
  4. Is there such a thing as a risk-adjusted cost of using a custodian? I have never heard of any reliable way of calculating such a thing. It may be so fraught with unknowables that it isn't worth trying.
381 sats \ 5 replies \ @kepford 1 Feb
Nothing is free. One of the many things my dad taught me. If someone is telling you something is free look out. The rug pull is coming. This includes third party custody. As you point out the costs can be hidden.
I don't think individuals are generally stupid. So if many of them are doing something (using a custodian), I wonder if they have a good reason.1
Many are stupid. Many are ignorant. Many are busy. Some are self aware of their flaws and make this decision to give up custody wisely. And some are just lazy. I think laziness is the main factor. But there are probably many factors.
With lightning there are middle grounds like Phoenix and Zeus. You aren't running your own node but you are not fully trusting a custodian like you do with WoS.
With all that said the larger issue with self-custody is personal responsibility. Few have it in my experience. Bitcoin removes the requirement for trusted third parties but you always have to trust someone. At minimum yourself. For all the reasons you state I believe there will always be third party custodians. The idea of Fedimints is a model that seems viable for this. A model better than the existing fiat system. This will continue until people learn personal responsibility. Many will need to be rugged. I think we should still push for self custody.
Good post btw. Need more like this.
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I find it difficult to tell the difference between a lazy user and a user who would rather spend their time on different priorities.
I think I've heard people like nvk say they use a custodian for lightning because self custodial lightning requires more resources than it's worth for the amounts they are using.
And another element I didn't touch on is culture: as you point out, we don't live in a culture of personal responsibility. So it isn't surprising that money built on taking responsibility may be misunderstood (may have costs/risks miscalculated).
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296 sats \ 2 replies \ @kepford 1 Feb
Running a lightning node for a business does require an investment and I totally get why NVK would take that approach. I mean, that is the kind of decision you have to make in a business all the time.
I run a lightning node because of how highly I value sovereignty as well as the knowledge I'm gaining from the experience.
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133 sats \ 1 reply \ @rarson 1 Feb
I run a lightning node because of how highly I value sovereignty as well as the knowledge I'm gaining from the experience.
I think knowledge gained is often overlooked and undervalued, in general (not just with regards to running a node).
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Yes, very true. We do not invest in our own improvement enough.
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110 sats \ 0 replies \ @kepford 1 Feb
I find it difficult to tell the difference between a lazy user and a user who would rather spend their time on different priorities.
I do as well. Honestly its more important for me to know when I'm being lazy vs prioritizing. Doesn't really matter if I can tell in others. I can't and don't want to control them. If I have an agreement with them and they aren't getting it done... well I don't really care if it is laziness. It just needs to get done.
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The problem isn't so much cost in fees, it's just most people don't trust themselves with keys with the risk of losing all their wealth, they have more thrust in a company like coinbase. Others also don't even want to learn about all the technical stuff, they just want to hodl it and expect it to go up in value. About lightning, lightning is even worse than onchain, you have to run a node where your fund are not in cold storage, you have to manage channels and liquidity even in something like Phoenix try to tell someone that they can't reveice more than X because of inbound liquidity and to have more they have to pay to Phoenix to have more liquidity for one year and you still have to pay miners fees. I don't judge people that choose their tradeoffs, I think Fedimints might be a good compromise for these people if they know the custodians.
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Your observations are accurate. The maxis want Bitcoin to become widespread and expect ordinary citizens to sit for hours, research and try different options rather than custody. Here I was directed to the "self custody" option. But later I realized that there were many restrictions, so I returned to the "custody" option. My transaction fees have also dropped. I'm not a millionaire. I do not have much money. I'm using "custody" for now. If I have a lot of money, I may consider the "self-custody" option.
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Pienso qué todo es producto de la mala enseñanza general con la cual crecemos, donde nos han metido en el cerebro que esta bien no ser custodio de tus bienes ni de tu riqueza... Desde hace mucho los ciudadanos entregaron casi a control del gobierno y que sean ellos quienes toman desiciones!!! Por eso para el Normie promedio es difícil entender porque debe pagar una comisión al mover algo de btc. O porque debe guardar las 12 palabras para no perder sus sats
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Esto es cierto. Todo lo relacionado con el sistema financiero que tenemos hoy en día nos dice que no podemos hacerlo nosotros mismos. Los bancos, las casas de bolsa, las hipotecas, incluso la forma en que funcionan los impuestos, se han establecido para obligarnos a ceder el control y dejar que otra persona (que cobra una tarifa) lo haga.
Lo siento por mi mal español.
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I've often thought custodians should charge. Exchanges don't want to do that because it removes liquidity. I guess SN wouldn't want to do that because it removes liquidity. Still there is risk and there is effort so a nominal fee makes sense.
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Most do, even if they don't make it transparent. At the least, I would assume a custodian might use the funds they are holding to earn interest. I'm sure that there are laws regulating this, but I am very doubtful wallet of satoshi or fortress just have piles of bitcoin sitting around with labels next to each utxo saying who it belongs to.
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They'd know who sent each utxo but you're right, they'd pool them in their own wallets. It's highly risky to try to earn any interest on crypto holdings for customers. The fiat accounts would tend to be compartmentalized, but maybe they can earn some paltry interest.
Custodians tend to charge for withdrawal or just bundle it all into their transaction fees. It'd be more accurate to charge for storage directly but it seems the market doesn't support this idea.
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wow, footnotes!
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