Decoding Crypto Asset Storage: Why Diversification is Key for Your Project's Success

Any entity needs working capital to run and these funds need to be secured. Traditionally, a company would do that with multiple bank accounts. In Web3 majority of the working capital is in the form of cryptocurrencies (tokens and stablecoins) and the role of the bank accounts is taken up by Wallets.

Different types of wallets not only provide the safety of segregation but also serve specific roles in the running of a project.

The typical needs for a crypto organisation may include long term storage for hodling of tokens, medium term storage for day to day expenses and payrolls for different teams, or even short term storage for individual's expenses.

Typically, a combination of hot and cold crypto wallets is used to manage capital for these use cases.

Long-term Hodling

This forms the bulk of assets (in terms of value) for any organisation. Whether it is the protocol’s own tokens, funds raised in the form of stable coins or an  investment/hedging in the form of other tokens, this funds' primary purpose is to remain safe and secure.

Since they are not dipped into on a frequent basis, most organisations prefer to keep it either in cold wallets like HSMs (hardware security modules). The offer high security level as the key is in the sole ownership of individuals and away from any kind of network for the majority of the time.

These are prone to a single point of failure which is why it is wise to divide the assets across multiple hardware wallets. Some projects even utilise third party custodians to secure a portion of their assets for long term storage.

Quick day-to-day expenses

At the other end of the spectrum, lies this use case. Here some of the team members may need to hold a small portion of assets under their sole ownership for quick expenses.

Hot wallets such as metamask may be ideal for this. Easy, convenient and accessible for day-to-day quick expenses.

Even though they are single point of failures as loss of the key would mean loss of funds, when used for a relatively smaller amount of funds, it seems to be the most convenient solution for this use case.

Operational expenses

This is the biggest use case for any crypto project or organisation. This includes activities like payroll, expenses, vendor payments, grants, payments to collaborators etc. And this has very specific requirements in its own right.

The fund value under this head is not insignificant and yet it needs to be handy for frequent usage. As such neither cold wallets nor the hot wallets are a suitable solution. The ideal solution needs to be secure enough to eliminate single point failure and yet be accessible enough for frequent use.

Majority of the teams today use Multi-sig wallets such as Gnosis to manage their operational expenses. Multisignature wallets are a type of cryptocurrency wallet that requires more than one signature to authorise a transaction.

These wallets provide an extra layer of security since they require more than one signature to authorise any transaction. This can help prevent loss, fraud or theft. Additionally, multisig wallets can help Crypto organisations manage their funds more effectively since multiple teams can be given individual multisig wallets to operate with.  

Summing Up

A crypto project has multiple use cases for its digital assets - hodling, operational expenses and individual expenses. And there are different options to chose from.

Self-custody wallets offer organisations the greatest degree of control and security, but require the greatest amount of care and technical expertise to maintain. Further, cold self-custody wallets offer greater security and lower accessibility. Hot self-custody wallets on the other hand are extremely accessible but not as secure. Collaborative wallets like Multi-sig wallets offer organisations a balance of security and control.