In traditional banking, recovering access to accounts is relatively straightforward. A visit to the bank or resetting credentials online can restore access. However, in the world of crypto, the self-custody nature of assets makes recovery much more complex. While this self-custody reduces counterparty risks, it comes with added responsibilities for users.
If a crypto investor loses their private key or seed phrase, recovering access to their wallet is nearly impossible. Chainalysis reports that 3.7 million Bitcoin, valued at over $220 billion, is lost forever due to lost keys. Similarly, 912,000 Ethereum, worth $2.41 billion, has been irretrievably lost.
Common Scenarios of Lost Crypto Wallets
There are several scenarios where even seasoned crypto users lose access to their assets. For instance, an investor might store both their private key and seed phrase on the same device, wiping it during an upgrade and losing access forever. In another case, a recovery phrase written on paper could be misplaced during a move, leading to a permanent loss of assets. Additionally, trust issues within organizations, where one individual holds the keys, can result in lost access after disputes.
Other causes of lost crypto include data corruption, hardware failures, hacks, or even mortality.
The Need for Decentralized Trusts
Wallet recovery services exist, but their success rate is low, and many fraudulent providers ask for upfront payments without delivering results. A more reliable solution is the use of decentralized trusts. Investors can designate a backup wallet, and if they lose access to their main wallet, assets automatically transfer to the backup after a set period of inactivity. This prevents permanent loss, even in the case of an investor’s passing, as decentralized trusts can be configured for inheritance.
The Future: Decentralized Trusts and Multisig Technology
Multisignature (multisig) technology, used by decentralized trusts, requires multiple private keys for transaction approval. This reduces the chances of human error, eliminates single points of failure, and prevents unauthorized access. For DAOs, Web3 teams, and crypto organizations, decentralized trusts provide a secure way to manage assets collectively.
At a fraction of the cost of traditional recovery methods, decentralized trusts offer a robust solution to wallet recovery. As more investors adopt these systems, fewer assets will be lost to human error, creating a safer and more resilient crypto ecosystem.
