Differences between Custodial and Non-custodial crypto wallets

Just for your safety, you should decide and make sure you know what to choose between a custodial and non-custodial wallet to store your funds before purchasing cryptocurrency

Before delving into the basic differences between a custodial and a non-custodial crypto wallet, it is important to know what a ‘crypto wallet’ means and how it works.

A crypto wallet is a software, mobile app or physical device that is used to store cryptocurrencies and allows for the sending and receiving of crypto. This type of wallet is different from the regular folded piece of leather you use to keep your bank notes; rather, it’s a software. The purpose of a crypto wallet is to store cryptocurrency “keys” and interface, using a blockchain technology. Since you can’t physically see or keep Bitcoin in your pocket, you need a place to keep it; and what you need is a wallet.

Quick Tip: A wallet does not actually store the cryptocurrency; it simply holds both the private and public keys, serving as a door to the funds on the private keys, situated on a public ledger which is the Blockchain.

Wallets help people keep an eye on their account balances and value, serving as a threshold to access their funds. Whether you are a crypto investor, trader or holder, you must know the best type of wallet to use (Either Custodial or Non-custodial) at any given time.

It’s also important to note that a wallet basically contains two types of keys – Public and Private keys. A public key is like an email address that you can safely share with the public, allowing you to receive cryptocurrencies. Public key simply works like your bank’s account number.

A private key on the other hand is typically a string of letters and numbers which is not meant to be shared with anyone. This can be regarded as a password that grants access to your money. As long as you have your private key, you will have access to your funds and you can manage it anywhere in the world. If anybody has your private key, then they have ‘unlimited’ access to your funds.

CUSTODIAL WALLET

A custodial wallet is a type of wallet that keeps users’ private keys and provide security for their assets. The private keys are held by a third party and they have full control over your funds. In other words, you’re trusting them to secure your funds so as to lessen your personal responsibility. Most custodians are usually crypto exchanges which you must trust. Some examples of custodial wallets are – Binance, Crypto.com, Hotbit. You don’t actually hold the cryptocurrencies in your wallet (because you don’t have any private keys), it is wholly held by the exchanges. Meaning, anytime you want to send out your coins from a custodial wallet, you have to make a request which would be approved by the custodian from which you are making the request.

NON-CUSTODIAL WALLET

A non-custodial wallet is a type of crypto wallet that allows users to be their own bank. It gives you a full control over your funds to the exclusion of any third parties or custodians. In this type of wallet, users hold their private keys and are responsible for it. Users of a non-custodial wallet can manage and withdraw their funds easily without looking up to a third party.

Some examples of a Non-Custodial wallet are – Trust Wallet, Metamask, Ledger Nano S, Trezor One etc.

Non-custodial wallets are very secure, compared to custodial wallets because – no one, not even the developer of the software can know your private keys, which gives you unlimited ownership over your funds. It is a secure way to personally store your crypto, but you have to follow certain steps so that you are able to recover it should you lose it. Non-custodial wallet can be in two form – software (hot) and Hardware (cold).

Quick Tip: As long as you have your private keys, you always have your money.

Opening a custodial wallet only requires your email (or sometimes, phone number) and a password. So, if you lost your login details, you can simply request for a ‘reset’ and you will be given assess to your assets back immediately. Custodial wallets are a best option for newbies, as they are not really complicated and difficult to use. In custodial wallet, the security level of your asset is low, unless the custodian implements strong security measures. Meaning, if the custodian does not implement strong security measures, the exchange can be intruded by hackers and all funds thereon will be wiped off. Some exchanges like Altsbit, Upbit, Bitmart, Bitrue and Vindax were victims of hacking, and they lost thousands (if not millions) of dollars to intruders. Definitely, this will affect the users.

Non-Custodial wallet is invulnerable to attack, it cannot be hacked unless if the holder is careless with his secret phrase.

While setting up a Non-custodial wallet, 12 or 24 random words will be automatically generated for you by the system; you are expected to write them in a safe place, where nobody can have access to.

CLOSING THOUGHTS

Deciding on which wallet to use between a custodial wallet and non-custodial wallet is very important, regardless of what you do with cryptocurrency. If you are a crypto trader, you may need to use a custodial wallet more frequently because it is very easy and fast for trading. But if you are a long time holder of a large amount of coin, you are advised to hold your coins in a Non-custodial wallet, particularly a hardware wallet because of how secure it seems to be.

Some prefer a custodial exchange account (Like Binance), while others prefer non-custodial wallets (like Trust wallet), and some are using a combination of the two. Notwithstanding the one you choose, make sure to always follow best security practices.