FOLLOW THE MECHANISM
- 1Asset
- 2Controller
Keys or contract rules authorize movement.
- 3Claim
A customer may hold a separate entitlement against an intermediary.
A conceptual sequence. Real implementations can add steps, intermediaries, and conditions.
Keys versus a customer claim
In a simple self-custody arrangement, the holder controls the material needed to authorize spending. In a custodial arrangement, a service controls the keys and records a customer entitlement in its own system. That entitlement may be backed by pooled assets and governed by contractual terms. Sending coins to an exchange can therefore exchange direct onchain control for a claim against the service, even if the dashboard uses the same token symbol.
Control has more than one layer
A smart-contract position introduces code-based permissions: assets may move according to a contract even when no company holds a single spending key. Administrators, upgrade authorities, emergency guardians or recovery modules can still have important powers. Conversely, multiple independent signatures can limit a single operator. A useful custody map identifies normal transfers, emergency actions and upgrades separately instead of treating “decentralized” as a complete description.
Availability and solvency differ
A service can be unable to process withdrawals because its systems are down even if assets remain sufficient. It can also be insolvent if obligations exceed recoverable assets. An onchain reserve address reveals some assets but not necessarily all customer claims, encumbrances or offchain liabilities. The same accounting distinction applies to a bridge or issuer. Evidence of assets and evidence of complete liabilities answer different parts of the balance-sheet question.
Responsibility changes hands
Self-controlled keys require resilient backup and careful authorization. Custodians may offer recovery and operational convenience, while exposing users to discretionary freezes, key compromise and failures in the custodian’s business. These are mechanism trade-offs rather than a universal ranking. The educational test is concrete: who can move the assets without the customer, who can stop a withdrawal, and what remains if the interface or company disappears?
MAKE IT CONCRETE
A simple custodial balance sheet
Illustrative service: customer balances total 1,000 units, but the service can recover only 800 units of assets. Showing each customer a full balance does not fill the 200-unit shortfall. By contrast, a temporary maintenance pause with 1,000 accessible backing units is an availability problem. Neither scenario is resolved by an attractive wallet display.
FAILURE PATHS & COMMON MISREADINGS
Where the model can break
KEEP EXPLORING