Third-party custody solutions, on the other hand, involve entrusting the security of one's digital assets to an external service provider. These providers are responsible for safeguarding the keys on behalf of the asset holder. As we will see later, there are also multiple different ways to achieve this.

However, this constant internet connectivity also makes hot wallets more susceptible to online attacks and thefts. For example, phishing attacks are susceptible to happen with a Metamask wallet. Other common attacks might be linked to browser extensions or malware on your computer, as your private key, that is used to sign and authenticate your transactions, is stored on your computer.

These wallets are considered significantly more secure against online attacks, as they require physical access to the device for transactions. However, the trade-off comes in the form of convenience, as accessing funds is less straightforward than with hot wallets.

These companies provide a complete infrastructure to manage the lifecycle of all types of digital assets issued on the blockchain. There are actually three different ways for these companies to offer their custody solution: on-premises solutions (where the infrastructure is hosted by the client), cloud solutions (leveraging the security and scalability of cloud services), and hybrid models that combine both.

HSMs provide a robust layer of security by performing cryptographic operations within a tamper-resistant hardware environment, thereby significantly reducing the risk of key compromise. HSMs might work automatically, but in the highly secure world of banking, physical persons are needed to sign HSM transactions.

Cloud storage, conversely, relies on the infrastructure of providers like AWS or Azure, emphasising scalability and easy access. These platforms often employ Multi-Party Computation (MPC) to secure cryptographic keys by distributing operations across multiple parties, ensuring no single point of failure.

This move underscores the trust and reliability that Coinbase has built in the digital asset custody space, combining their security practices with regulatory compliance to serve institutional needs. Notably, the leader boasts two significant achievements: its 12-year track record without a security breach and being among the first cryptocurrency firms to receive a license from the NY Department of Financial Services (NYDFS). Currently, it oversees the protection of $193 billion in digital assets, which includes $101 billion belonging to institutional clients, as reported in the fourth quarter of 2023.

As the digital asset space continues to mature, the evolution of these custody solutions will play a pivotal role in the broader acceptance and integration of cryptocurrencies into the global financial system. Indeed, trust is one of the main limitations to the broader acceptance of digital assets.