You just purchased your first NFT. Where is it? Is it sitting in your account on the marketplace you purchased it from? Do they have custody of your digital asset or do you? Did you transfer your NFT to your crypto wallet? If so, do you believe your new NFT is actually in your wallet? It isn’t. That’s not how this works. Here’s what is really in your wallet.
The awesome NFT you just transferred to your digital wallet is not in your wallet. The only thing in your wallet are your private keys, which are used to record your transactions to the blockchain. The file you just purchased (artwork, music, video) usually isn’t stored on the blockchain either. In most cases, the NFT just points to a good, old-fashioned URL (internet address) or a Web3 content ID where the file can be found. You may think this is a distinction without a difference. I assure you it is not.
Your Private Keys
Digital wallets do not store NFTs, cryptocurrencies, or any other digital assets directly. They store your “private keys,” which are used in combination with “public keys” to complete blockchain transactions. You can learn about PKC (public key cryptography) here.
If you say, “I own a Bored Ape NFT,” what you are really saying is that you have one or more private keys in your digital wallet that, when combined with your public key, can be used to sell or trade the specific Bored Ape NFT associated with your public key. Your private key(s) secure your digital assets. They are, for all practical purposes, the “keys” to your vault. Treat them as such.
NFTs Are Smart Contracts
NFTs are smart contracts recorded on a blockchain. They are not the “artwork,” but instead they represent the ownership of (and contractual terms associated with) the “artwork.” You can think of an NFT as a “certificate of ownership.” When an NFT transaction takes place, the data associated with that transaction (wallet addresses, location of the files, metadata, etc.) is typically recorded on an easily verifiable public ledger (blockchain). Importantly, NFTs can be used to certify ownership of anything – digital or physical.
Do You Have Custody of Your NFTs?
The only way you can say you own an NFT is if you can transfer it to your own digital wallet. This is very important for most NFTs, but not all. For example, there are plenty of wonderful marketplaces and exciting NFT experiences, such as NBA TopShot, where you are encouraged to leave your NFTs in the pseudo-wallet the NFT owners give you with your account. These experiences generally include loyalty points or game credits and are set up to maximize your engagement with a centralized website. This isn’t a bad thing. You’re playing an NFT-based game inside a trusted ecosystem. Why are these companies using blockchain and NFTs on a centralized website? That’s for another column.
A real NFT is easily transferable to your digital wallet – and that’s where it belongs. For example, NBA TopShot allows you to send your “Legendary Moments” to third-party wallets. You can truly own your NFT, but – because NBA TopShot really doesn’t want you to leave their marketplace – you lose your collector points and other benefits of staying in the DapperLabs/NBA TopShot ecosystem.
There are very good reasons to leave your NBA TopShot NFTs right where they are. NBA TopShot NFTs were created to serve the community of passion around the game of professional basketball. We trust the NBA as the central authority for basketball, so the conventional benefits of a trustless and decentralized ecosystem do not apply. But for any NFT you purchase on a public marketplace (OpenSea, Rarible, SuperRare, Foundation, Nifty Gateway, Mintable, etc.) you want to transfer custody to your own wallet as quickly as practical.
Keeping Your NFTs and Other Digital Assets Safe
Anyone with access to your private keys has access to 100 percent of the digital assets in the associated wallet. Never share your private keys with anyone. Ever!
First, anything that can be hacked will be hacked. So, there is no such thing as perfect security. That said, there are two basic types of digital wallets: software and hardware.
Software wallets are generally more vulnerable to attack than hardware wallets, and you should take extreme care to secure your private keys. It is also important to note that software wallets running on MacOS are less likely to be hacked (using operating system-based attack vectors) than similar wallets running on a Windows PC. (People will argue this point. Please don’t argue about it with me. Reach out directly to Tim Cook or Satya Nadella for clarification.)
Hardware wallets are your best bet. I’m partial to Grid+ Lattice, Ledger, and Trezor. There are many others. If you have any substantial amount of digital assets, a hardware wallet is the safest option. (Pro tip: Only purchase a hardware wallet directly from the manufacturer’s website.)
Jacob Cantele, Lead of Operations at MetaMask (the most popular software wallet) suggests that the best approach is to use a software wallet (MetaMask, in this case) combined with one of the hardware wallets listed above. This gives you the convenience of a software wallet and the security of having your private keys protected by a hardware wallet until needed.
Are My Digital Assets Truly Safer in My Custody?
Your digital assets are safer in your custody only if you take the time to learn how to protect them. This is time consuming. In the world of decentralized finance, you are the investment committee, the security guard, the alarm system, the vault, and the keeper of keys. This is not something normal people ever have to think about. We’re used to putting our money in banks and letting the banks (and the rule of law) protect us. None of those protections exist for cryptocurrency, NFTs, or any other blockchain-based assets. Do your homework.
Author’s note: This is not a sponsored post. I am the author of this article and it expresses my own opinions. I am not, nor is my company, receiving compensation for it. I am not a financial advisor. Nothing contained herein should be considered financial advice. If you are considering any type of investment you should conduct your own research and, if necessary, seek the advice of a licensed financial advisor.