Keys, wallets and custody

What a key actually controls — and why “wallet” is a misleading word.

This lesson has had no expert review. It was written for this platform and against the evidence it cites; nobody has gone through it independently.

Learning objectives

You can explain why a wallet contains no assets.
You can distinguish the three custody arrangements and name who is liable in each.

Check your prior knowledge

Answer these for yourself before reading on. Wherever you hesitate is where this lesson pays off.

Where do your coins sit once you install a wallet?
What happens if you lose the device?
Who can initiate a transaction in your name?

Core concept

Fact

The wallet contains nothing

Balances live in the chain's ledger, not in an app. A wallet only manages the private key that signs transactions for an address. Whoever has the key can dispose of the funds; whoever loses it no longer can — neither changes the ledger entry itself.

Interpretation

Three custody arrangements, three liability positions

Self-custody: the user holds the key alone — nobody can freeze the funds, nobody is liable for a loss. Third-party custody: a company holds the key, can freeze the funds and is liable depending on contract and supervisory law. Shared custody (multisig, MPC): several parties must act together, and liability is then a question of the arrangement between them. For an organization this is a governance decision, not a technical one.

Risk

Signing is not reading

A signature authorizes what is in the transaction payload — not what the interface shows. An approval can be unlimited and stays in force until explicitly revoked. The most common path to loss in DeFi is therefore not broken cryptography but a correctly signed transaction whose content the signer did not check.

Definitions

Private key: The secret that signs transactions for an address.
Wallet in the glossary: Software or a device that manages keys and signs transactions.
Non-custodial in the glossary: The user holds the key; no third party can dispose of the assets alone.

Model

Private key — the only secret
Signature over a transaction payload
Address whose balance is in the ledger
Approval to a contract — persists until revoked

From key to control — The last step is the one most often overlooked.

Worked example

The same position, two custody arrangements

Position: USD 100,000 in a lending market
Variant A: keys in-house, 3-of-5 multisig
Variant B: keys with a custodian, contractual liability

Protocol risk is identical in both — same contract, same parameters, same oracle. The only difference is who answers for a key loss and how fast action is possible.

A: no third party, but no liability either. B: liability by contract, at the price of depending on the custodian.

Reading: Custody and protocol risk are two separate questions. A good answer to one says nothing about the other.

Retrieval

In the wallet app on the device.In the chain's ledger; the wallet only holds the key to them.With the wallet's provider.

Nobody can freeze the position — and nobody is liable for a key loss.Protocol risk is lower as a result.Recovery through the provider remains possible.

Exercise on real data

Look up “wallet” and “non-custodial” and put the difference between them into one sentence.

Look the terms up in the glossary →

Application

Which three controls would you put in place before an organization takes a first on-chain position?

Related case studies

CASE-06 — What the explorer shows and what it does not

Institutional reading

Bank: Does the chosen custody arrangement meet the supervisory requirements for safekeeping?
Asset management: Who inside the firm may sign, and how is that evidenced?

Key takeaways

A wallet holds keys, not assets.
Custody and protocol risk are separate questions with separate answers.
A granted approval persists until it is revoked.