How do crypto-vaults work?
By: Ioana Alexandra Frincu
Tags: Crypto, Defi, Hodl, Finance

People store their money using many methods, and we all know that setting some aside for rainy days is the way to keep ourselves safe. Similarly, crypto users can organize their money into wallets, AMMs, or vaults. Vaults can store cryptocurrency just like regular wallets. Moreover, they can prevent stored crypto from being immediately withdrawn.

Photo by Kelly Sikkema on Unsplash

There are multiple ways to keep digital assets in designated virtual places. Before creating their digital vault, users should understand what vaults are used for and when they should store their crypto into them. Secondly, they must know the difference between digital cryptocurrency vaults and wallets. Wallets are instantly accessible tools. The thing about them is that users only have their security model to protect them. If someone gets their private key, there is no recourse.

Unlike wallets, vaults offer a Plan B. They are much more secure places to store crypto assets. Crypto vaults are not connected to the network, so users do not have to worry about any individual who may want to access their funds if the account linked to the vault eventually gets hacked. Crypto assets stored in vaults have specific encryption methods, making them useless for attackers unless they have specific codes. If the security of a vault falters, users have a clawback mechanism.

The ideal use-case for vaults is to store crypto when the user does not need to withdraw money for a longer period of time, just like bank deposits. Also, vaults are good options for those who wish to hold their crypto long-term and get notifications for every request to spend funds that appears. Holding onto cryptocurrency for long periods can be smart, as the crypto market sees increasing attention and the supply cannot properly fit the demand. Keeping assets in both wallets and vaults would be the best approach because it allows the owner to benefit from increased security and the wallets’ convenience.

Photo by Diane Helentjaris on Unsplash

There is another option we call ‘group vaults,’ which can be used by multiple people to form a consensus on how they spend their funds. Group vaults allow them to control how they spend and split the assets by using their accounts and email addresses.

HODLing (a word used by the crypto community for holding the cryptocurrency rather than selling it) in difficult times has proven to be a long-term winning strategy in terms of economy. It is much more secure for users to keep their cryptocurrency in their storage. But this behavior leads to less dynamic crypto markets and, therefore, more significant economic repercussions. Thus, companies that provide vault storage services for crypto assets gained prominence for being reliable virtual spaces for keeping virtual assets.

One can differentiate wallets from vaults by comparing them, for example, with ‘checking’ and ‘savings’ accounts.

People handle their everyday transactions from their wallets (like grocery shopping transactions). The refilling of the account is done through the wallet, too (receiving a direct deposit). Long-term storage means keeping their funds in their vaults. The money is moved from the wallet to the vault, like checking to savings, and every action takes more time to access. Although the extra access time sounds like a disadvantage, it helps vaults be safer for storing crypto assets. Saving assets in long-term vaults may also provide tax advantages.

Whether you are a HODLer at heart or want to keep your funds safe, vaults can be an option for you. It’s important, though, to analyze the level of control you have over vaults, the interest rate returned, and never to risk more money than what you can afford to lose.

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