Storage of Cryptoassets: Fundamental Principles
The storage of cryptoassets differs fundamentally from the custody of funds in the traditional financial system. In the banking model, ownership rights are recorded in centralized ledgers maintained by financial institutions. In blockchain-based systems, however, control over assets is determined by possession of cryptographic keys, rather than by entries in an institutional database.
For this reason, the crypto ecosystem often relies on a simple principle: whoever controls the private key controls the assets.
What “Storage” Means in a Blockchain Context
Cryptoassets are not physically stored in a wallet or on a user’s device. They always exist on the blockchain itself, in the form of ledger entries that reflect balances or account states. A wallet does not contain coins or tokens in a literal sense; instead, it manages the cryptographic keys that enable a user to authorize transactions.
Accordingly, storing cryptoassets means managing private keys. The loss of a private key results in the permanent loss of access to the associated assets, while its compromise transfers effective control to a third party.
Public and Private Keys
All blockchain systems are built on asymmetric cryptography, which relies on a pair of mathematically related keys.
A private key is a large randomly generated number (typically 256 bits) that must remain secret. A public key is derived from the private key using elliptic curve cryptography. From the public key, an address is generated — a shortened representation used within the network to receive funds.
The relationship between these elements is one-directional: knowing the private key allows the derivation of the public key, but knowing the public key or address does not allow reconstruction of the private key under current computational capabilities. This one-way mathematical property underpins the security of blockchain systems.
Illustrative Example
Below is an example of an Ethereum address and its corresponding private key. This example is provided solely for educational purposes and must not be used in practice.
Ethereum address: 0x742d35Cc6634C0532925a3b844Bc454e4438f44e
Private key: 0x4c0883a69102937d6231471b5dbb6204fe5129617082791f6f5f6d6a3b7c9e11
A public address may be freely shared with others for the purpose of receiving funds. A private key, by contrast, must remain strictly confidential. Its disclosure or loss results in irreversible loss of control over the associated assets.
Wallet Generation and the Role of Seed Phrases
The creation of a crypto wallet begins with the generation of random entropy. From this entropy, a private key is produced, followed by the derivation of a public key and an address. Modern wallets typically follow deterministic standards, allowing multiple addresses to be generated from a single master source.
This master source is commonly represented as a seed phrase — a human-readable sequence of words. The seed phrase effectively functions as a master private key. Possession of the seed phrase grants access to all assets associated with the wallet.
Transaction Signing
When a user sends cryptoassets, a transaction is created and digitally signed using the private key. Network nodes verify the signature using the corresponding public key. If the signature is valid, the transaction is accepted and recorded on the blockchain.
Importantly, the private key itself is never transmitted to the network. Only the digital signature is shared. This mechanism allows ownership to be proven without revealing secret information.
Models of Cryptoasset Storage
From a practical perspective, storage models differ primarily in terms of who controls the private key.
| Storage Model | Key Control | General Characteristic |
|---|---|---|
| Custodial | Third party | Keys are held by a service provider (e.g., exchanges, banks) |
| Non-custodial | User | The user independently manages their keys |
| Hardware wallets | User | Keys are isolated within a dedicated device |
| HSM | Organization | Hardware-based secure storage at the institutional level |
| MPC | Distributed model | The key is logically divided among multiple parties |
| Multisig | Distributed model | Multiple private keys are required to authorize a transaction |
The first two models are typical for retail users. HSM and MPC solutions are primarily employed in corporate and institutional environments, where security, compliance, and risk management requirements are significantly higher.
Storage as a Fundamental Risk Factor
Blockchain systems do not provide centralized recovery mechanisms. There is no password reset function and no customer support authority capable of restoring lost access. Responsibility for key security rests entirely with the owner or with the selected custody infrastructure.
For this reason, most losses in the crypto ecosystem are not caused by flaws in blockchain protocols, but by errors in key management.
Conclusion
The storage of cryptoassets is not the physical retention of digital objects, but the management of cryptographic keys. Understanding how keys are generated, how they are related, and how they are used to authorize transactions is a fundamental prerequisite for secure interaction with blockchain systems.
Ultimately, real control over cryptoassets depends on the architecture of key storage, regardless of the network’s technological sophistication or the market value of the assets involved.