Custodial vs Non-Custodial Wallet – Understand The Main Differences
December 27, 2022
If you have been in the crypto landscape, you must be familiar with cryptocurrency and crypto-wallets. Cryptocurrency is digital money, and wallets are safe and secure places to hold your digital funds.
With each passing day, blockchain developers and technology experts are keen to incorporate the new advancements in designing crypto wallets to store your precious digital items. The traditional crypto models are left behind with the advent of novel cryptocurrency wallet designs.
With all the information you have, let us move one step ahead to understand the crypto wallets and their types. Let’s find out the key differences between the custodial and Non-custodial crypto wallets to make the suitable choice for your cryptocurrency exchange.
What are Custodial & Non Custodial Crypto Wallets?
Crypto wallets are responsible for storing and accessing digital currencies. The crypto wallet enables the users to send and receive the cryptocurrencies such as Ethereum, Bitcoin, and many others. The crypto wallets constitute the private keys-passwords to access the cryptocurrencies, and the public keys-allowed to share with others. Safeguarding the private keys is the key responsibility of the crypto wallet, which determines the safety and security level offered by the crypto wallet.
The wallet generates a unique address as an identifier to locate the crypto assets on the blockchain network. Depending on the security required for the funds, these are two types of crypto wallets: Custodial and Non-custodial Wallets. Both types of wallets are proven as the best individual choices to fulfill specific needs. It is up to the user to identify the need for a wallet after comparing both the wallets based on the grounds of specific factors.
Types of Crypto Wallets: Custodial And Non-Custodial Wallets
In custodial wallets, the centralized authority or third party has full control over the private keys and crypto funds, although your permission is required for sending/receiving the cryptocurrencies. The custodial wallets relieve the users of the responsibility to safeguard digital assets. The most famous custodial wallet these days is coinbase.
Custodial wallets have an additional advantage for the newbies as they don't have to operate them alone. So, anybody with no advanced technical knowledge can go ahead with the custodial wallet options for cryptocurrency trading. Most custodial wallets are web-based, so all you need is a browser and the internet for access.
On the other hand, the custodial wallets bring some challenges, like suddenly locking users out of the wallet. This way, users will lose control over all of their digital money.
Many times a coinbase custodial wallet has faced the same issue. If you want to rely on a custodial wallet, you must look for a reliable service provider and explore various facts like types of services, where and how private keys are stored, insurance coverage, etc.
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What Are The Pros/Cons of Custodial Wallets?
Following are the pros of considering the custodial wallet:
Fast and Free Transactions
Custodial wallets charge no transaction fee, unlike the other wallets. The custodial wallet ecosystem allows the users to execute transactions completely free of cost. This way, customers can save a considerable amount of money yearly while making transactions.
Custodial wallets offer a high user experience for the user interface. The experts and the newbies can easily navigate through the wallet. Customers can find what they look for smoothly and systematically.
High Backup Chances
We have already stated that a third party manages your funds and private keys. The exchange authority is also responsible for managing the backup facilities. So, It is quite easy to restore or undo any transaction with the help of a third party.
If the user loses the private keys, there will not be an issue as the exchange authority will help to regain access to the private keys. Custodial wallet users face authority issues as everything is controlled at the end of a third party.
Cons of Custodial Wallets
Using a custodial wallet means giving up all your authority over your crypto wallet. Though it looks like a simple and feasible way out here, we have listed the disadvantages that can cause discomfort to the users.
Full Third-party Control
When you start with a custodial wallet, you lose all your control over the digital money and the private keys. Every transactional process is under the supervision of the custodial party. They can perform operations on your funds and freeze the amount contained in the wallet.
The custodial wallets strictly recommend that users do KYC to access their funds and assets. You need to provide the documentation to verify your identity to start crypto transactions. When you need to prove your identity, it breaks the concept of anonymity.
Only Online Facility
The custodial wallets are not available offline; an internet connection is a basic requirement to operate the custodial crypto wallets from anywhere. So, this can be challenging for custodial wallet users if they need to access their wallets in an emergency.
Data Breaching Possible
In custodial wallets, the funds are stored in cold and hot wallets. Though hacking these wallets is not easy, they are prone to data breaching threats. For example, in 2014, the hackers successfully hacked almost 7-0% of the transaction, causing a loss of $450M.
A non-custodial wallet is where the holder has complete control over the funds and private keys. These are the best option when you want to be the ruler of your cryptocurrency without the involvement of intermediaries. So, you are allowed to trade directly from your crypto wallet.
Non-custodial wallet users can easily interact with decentralized applications. For example, MetaMask and TrustWallet are popular examples of non-custodial wallets. Following are the types of non-custodial wallets:
Web-Based Wallets & Mobile Wallets
What Are The Pros/Cons of Non-Custodial Wallets?
Non-custodial wallets offer you an amazing set of advantages listed below:
Full Control in Non Custodial Wallets
More and more people have started investing in crypto and don't appreciate the control of a third party over their assets. And with a non-custodial wallet, the users get the best experience with the full authority of the funds and private keys.
No Data Exposure Risk
No intermediary means your details and identity is not revealed to anybody. So, there is no risk of data exposure involved, including the funds and details.
The custodial wallets streamline the process to withdraw the assets. The process is fast as there is no role of the third party in executing the transactions.
Cons of Non-custodial Wallets
The opportunity to be your own boss to handle cryptocurrency also brings some cons to the table. Here we have mentioned below:
Sense of Responsibility
All is the user's responsibility, from storing to keeping the keys in a safe place. A little mistake can lead to a bigger financial loss. Robbery can happen anywhere, whether you hold the private keys in a hardware wallet or a desktop.
Custodial wallets are not the best when offering a high-quality user interface experience. Users may experience difficulty in navigating the wallet.
Keys Loss is Money Loss
Private keys are the only way to restore your wallet if you need them. If you lose your private key, there is no way to regain access. You can be logged out of your wallet, causing a financial disaster.
Custodian vs Non-custodian Wallet-Key Differences
How easily you can create your wallet account matters a lot. The ease of creating an account is important to offer the best user experience. When you sign up for a custodial wallet, KYC and AML procedure is mandatory to offer robust security.
Still, at the same time, you have to be patient to get your account created, as it is a time-consuming process. On the other hand, non-custodial wallets take less time for account creation and keep the user anonymous.
Access To Funds
The one key factor that differentiates both is fund accessibility. With a custodial wallet, every detail about your funds and your private keys is accessible by a third party. With a non-custodial wallet, you have complete authority on funds and keys. Few risks are associated when you hand over the responsibility of your assets to somebody else.
However, if you want to stay free from safeguarding your assets, then custodial wallets are best for you. And they better know how to restore and back up your data if required.
Security is the prime factor when someone signs up for a crypto wallet. Custodial wallets are secure and safe to store your assets as they have strong and unique authentication procedures. But, these crypto wallets need a strong internet connection. On the other hand, your keys are kept confidential in custodial wallets, so there is no risk of any unauthorized access.
Which Crypto Wallet Should You Choose to Store Your Digital Assets?
The crypto wallets are perfect for storing your assets depending on different conditions and as per your needs. Investors and traders should ensure that the wallet supports the type of cryptocurrency they want to store and trade. And the wallets get updated from time to time to meet the users' needs. MetaMask, MathWallet, and TrustWallet are famous non-custodial wallets to store popular crypto assets. Remember that if you want to interact with the Defi applications, then non-custodial wallets are ideal.