Back to the list

Crypto Vaults – How Do They Work And Are They Safe?


blockster.com 08 November 2021 22:00, UTC
Reading time: ~3 m

People store their money in different places to suit their various needs. In fact, that is why there are distinct classes of bank accounts (checking accounts, saving accounts), as well as several types of denominations, e.g., American paper currency come in seven denominations: $1, $2, $5, $10, $20, $50, and $100.

These enable people to organize their capital in the most efficient way. For instance, checking accounts can be used to make everyday purchases, while saving accounts are designed to store money securely for the long term. And there is also cash, which comes in handy at times.

Similarly, users can organize their crypto holdings into numerous storage formats based on their needs. Keeping crypto-assets in a wallet enables users to instantly withdraw and make purchases. However, since these wallets are simply protected by one or two security layers, they are an inefficient method to store all crypto holdings — particularly if they are not to be used in the short term.

This is where crypto vaults come into play. Vaults store cryptocurrencies just like regular wallets, but also offer additional security measures. A user can set up a crypto vault with a withdrawal delay, which can be several days, as well as other constraints like transaction limits and group approvals.

Crypto vaults are storage solutions for crypto-assets that come with additional security measures. In general, crypto vaults ensure safety by applying a withdrawal delay and approval process. The delay and approval processes can take several days, and users have the option to cancel a transaction within this period.

Vaults also enable users to split ownership among several email addresses and users, requiring all the owners to approve a transaction before it can be processed. Additional constraints like transaction limits can also be added.

Crypto vaults support a range of crypto-assets depending on the provider. While there are vaults tailor-made to store the flagship cryptocurrency, some providers support dozens of altcoins and smaller tokens. For instance, Coinbase's crypto vault can store all of the exchange's 100+ supported currencies.

Crypto vaults are much more secure than traditional crypto wallets. For one, crypto vaults don't have network connections, which means even if hackers get their hands on accounts linked to the vault, they still can't transfer, or access crypto funds stored inside the vault.

Moreover, vaults use specific encryption methods to store cryptocurrencies, which makes them even more unreachable to attackers. Further, even if the security of a crypto vault pauses or diminishes, there is still a claw-back mechanism.

Moreover, the withdrawal delay process and the fact that an owner is notified of intended transactions add additional security layers to crypto vaults. Constraints such as transaction limits further protect an owner in case something goes wrong.

The defining characteristic of crypto vaults is their security, which is also their biggest advantage. The several-step authentication, which requires an owner to approve a transaction and also involves a withdrawal delay process, makes crypto vaults a very unappealing objective for hackers.

These features make crypto vaults a good option for holding crypto for the long run. HODLing (a crypto term used for when cryptocurrencies are held for the long term) has proven to be a winning strategy in crypto.

For instance, back in May, Bitcoin plunged by about 50% and dropped to below $30,000. Many investors panicked and sold their holdings even at loss. However, with Bitcoin breaking new all-time highs recently, it is evident that holding was a better option.

Nevertheless, it is worth noting that crypto-assets stored inside a vault are not instantly withdrawable. Some investors might consider this a downside since they won't be able to quickly trade in times of high volatility and exploit the market.

Back to the list