Custodial vs Non-Custodial Crypto Wallets

Cryptocurrency is digital money, and has gained immense popularity in recent years. Investing in cryptocurrency involves making a lot of challenging choices. After considering which asset to purchase, you must store the digital asset in a secure place.

The digital asset industry values security, as even the most competent platforms and individuals have previously failed to protect the funds from theft, fraud, or accidental loss.

The features of a crypto wallet can make the difference between keeping and losing money in specific scenarios, making it an essential part of crypto security.

After buying cryptocurrency, deciding between a custodial and non-custodial wallet is important. 

But how to know whether to choose custodial wallet or non-custodial wallet? 

When you use a non-custodial wallet, you have complete control over your private keys, which are associated with your cryptocurrency and serve as proof of ownership. A non-custodial wallet eliminates the need to rely on a third party, but it also requires you to ensure you do not misplace your keys and take all necessary measures to safeguard your funds.

On the other hand, when you use a custodial wallet, a third party manages your private keys. This means you are entrusting a third party to safeguard your digital asset and subsequently give it back to you when you are prepared to trade or transfer it. Using a custodial wallet allows you to avoid taking full ownership of your cryptocurrency, but you must have faith in the cryptocurrency exchange that acts as the custodian. 

Nowadays, people typically use web-based exchange wallets for custodial storage.

Let us uncover some basics facts before knowing the difference between custodial & non custodial crypto wallets.

What are Cryptocurrency 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.

The following are the key features of custodial wallets:

Third-party management: When we use a custodial wallet, a service provider takes care of the technical parts of keeping our digital assets safe.

Convenience: Beginners find custodial wallets great because they are simple to use and install.

Added features: Custodial wallets enhance functionality by offering extra features that allow users to buy, sell, and exchange cryptocurrencies directly on the platform.

Trust and risks: Using a custodial wallet requires trusting the service provider to secure your assets. If the service gets hacked, declares bankruptcy, or limits your account access, your money may be in jeopardy.

Personal information: When using custodial wallets, you may need to disclose personally identifiable information (such as identification) to comply with regulations.

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. 

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.

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.

Examples of Custodial Wallets

• Cobo wallet
• Freewallet
• Bakkt
• BitGo
• Venly Wallet

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Pros & Cons Of Custodial Wallets

Following are the pros and cons of considering the custodial wallet:

What Are Non-Custodial Wallets?

A non-custodial or self-custodial wallet gives you full control over your web3 based crypto wallet and assets. You have full control over your public and private keys.

Non-custodial wallets, unlike custodial wallets, allow the owner to retain full control of the keys instead of entrusting them to a third party, like an exchange. When you use a non-custodial wallet, you are solely responsible for the security of your private keys and the wallet itself. 

A non-custodial wallet resists censorship because the owner controls its access rather than the host platform controlling it, like in custodial wallets. This independence from third parties allows the owner to protect their assets from seizure by directly accessing their blockchain address. 

Types of Non-Custodial Wallets 

There are generally three kinds of non-custodial wallets. 

Software Non-Custodial Wallets: You can use a software non-custodial wallet app on your computer, mobile phone, or web portal to store and access digital assets. The software wallet's interface safely stores your private keys, which are always linked to the internet. Storing the private keys in these wallets online allows easy access and exposes them to digital hacks. Wallets like Trust Wallet and Metamask offer software non-custodial wallets. 

Hardware Wallets: Hardware wallets are the cryptographic wallets that keep your private keys offline in a safe physical device not connected to the internet. You need hardware to access your cryptocurrency holdings, which is usually a small device you can plug into your computer. Examples of hardware wallets include the Stax, Nano X, and Nano S Plus. 

Paper Wallets: Using a paper wallet, you can also store your private keys offline. You printed the document on paper, including your private keys and QR codes. To access your assets in the software wallet, you need a different cryptocurrency wallet app that can read the QR code. The most secure option is to keep your cryptocurrency in a paper wallet, completely disconnected from the internet. However, paper's inferior durability as a storage medium makes them less common. 

Examples of Non-Custodial Wallets

• MetaMask
• Exodus
• Coinbase Wallet
• Trust Wallet
• Ledger Nano S Plus

Pros & Cons of Non-Custodial Wallets

Non-custodial wallets offer you an amazing set of advantages and disadvantages as well, which are listed below:

Custodial vs Non-Custodial Wallet - Choose The Right One

Before selecting a crypto wallet, we should carefully evaluate our needs and priorities. Remember the characteristics of both custodial and non-custodial crypto wallets:

Convenience vs control: Non-custodial wallets offer more control and security, while custodial wallets offer ease of use and convenience.

Security and privacy: Non-custodial wallets prioritize security and privacy.

Technical proficiency: To use non-custodial wallets efficiently, you must have more knowledge.

By learning about custodial and non-custodial wallets, we can make a well-informed decision and keep your cryptocurrency safe.

Here are some other key difference about custodial wallet and non-custodial wallet you need to know before making a decision.

Account Creation

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

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. Both wallet options have benefits and drawbacks. If you want a wallet that offers both ease of use and a reliable backup recovery option, choose a custodial wallet. Choose a non-custodial wallet if you want full ownership of your private keys and total control over your cryptocurrency.

FAQs About Custodial vs Non-Custodial Crypto Wallets

What is the Difference Between Custodial and Non-custodial Cryptocurrency Services?

Users manage their own private keys in non-custodial cryptocurrency services, but third parties handle them in custodial services. The main difference between the two is this.

How Custodial Wallet Works?