Blog Misc Custodial vs Non-Custodial Wallet: Which is Better?

Custodial vs Non-Custodial Wallet: Which is Better?

date August 5, 2022 time 6 min read 273 views

Have you ever wondered how and where your cryptocurrency is stored after you’ve purchased it? Token holders can store their cryptocurrency in a variety of crypto wallets. However, they can be divided into two broad categories: custodial and non-custodial wallets.

Users must be aware of the distinctions between custodial vs non-custodial wallets when selecting the best cryptocurrency wallet in order to fully benefit from the technology behind cryptocurrencies.

With a non-custodial wallet, you have complete control over your private keys, which control your cryptocurrency and prove ownership. Another party controls your private keys when you use a custodial wallet. Nowadays, the majority of custodial wallets are web-based exchange wallets.

Both custody and non-custody wallets have advantages and disadvantages. Let’s examine their distinctions to help you determine when to use one or the other.

What is a custodial crypto wallet?

A custodial cryptocurrency wallet is one in which your digital assets are held in custody for you. This means that your private keys will be held and managed by a third party on your behalf. In other words, you will not have complete control over your funds, nor will you be able to sign transactions. However, using a custodial crypto wallet service isn’t always a bad thing.

If computer security isn’t your strong suit, you might be better off entrusting your crypto to a third party. A third-party custodian can assist you in ensuring that you do not lose access to your funds. (Source: Pixabay)

Most web-based crypto wallets are custodial wallets, and the first time you buy crypto, it will almost certainly end up in a custodial exchange crypto wallet. The exchange in this case is your custodian, who holds your keys and is in charge of securely storing your funds. It is critical that you use a trustworthy custodial wallet.

While a custodial wallet may be thought of as less secure than a non-custodial wallet, many people prefer them because they require less responsibility and are generally more convenient. If you do not take adequate precautions, losing your password to a non-custodial wallet could have financial consequences. However, if you forget your exchange account password, you should be able to reset it. To best protect the digital assets in your crypto wallet, follow the exchange’s recommended security measures.

When a user wants to send coins from a custodial wallet, they simply log in with a username and password, enter the public key of the location to which they want to send coins, and the business enters the private key to complete the transaction.

This results in a very simple solution for the user, but it also introduces an additional layer of risk. That is why it is critical to select a reputable exchange or service provider.

What is a non-custodial wallet? 

A non-custodial crypto wallet is one in which only the holder has access to and control over the private keys. Non-custodial wallets are the best option for users who want complete control over their funds. Because there are no intermediaries, you can trade cryptocurrency directly from your wallets. It’s a good option for seasoned traders and investors who understand how to manage and safeguard their private keys.

Non-custodial wallets, on the other hand, are more difficult to use than custodial wallets. When using a non-custodial wallet, users must keep in mind that if the private key is lost, the coins in the wallet are effectively lost forever. To reap the full benefits of a non-custodial wallet, users must establish a set of procedures to enhance security  and protect private keys.

No institution can refuse to process transactions since non-custodial wallets do not involve the outsourcing of trust to a third party. (Source: Pixabay)

Non-custodial wallets are a great way to ensure that user assets are not subject to censorship or confiscation; however, in exchange for this freedom, the holder of the private keys bears a tremendous amount of responsibility.

When interacting with a decentralized exchange (DEX) or decentralized application, you will need a non-custodial wallet (DApp). Popular decentralized exchanges that require a non-custodial wallet include Uniswap, SushiSwap, PancakeSwap, and QuickSwa. However, keep in mind that you are solely responsible for the security of your private keys when using these wallets.

Custodial vs non-custodial wallet

  • Private Key: When comparing Custodial vs Non-Custodial wallets, the most important factor to consider is who holds the private key. In the case of Custodial wallets, the private key is managed by a third party. In contrast, all blockchain custodian services reside with users in the case of Non-custodial wallets.
  • Transaction type: The transaction type is another factor to consider when comparing Custodial and Non-Custodial crypto wallets. In NNon-custodial wallet, the transaction is reflected on the chain in real time. However, this is not the case with Custodial wallet.
  • Security: All sensitive user data is stored in hot and cold storage in custodial crypto wallets, which are easily hacked by data intruders. As a result, unless the authoritative party implements strict security measures, the security level in custodial settings is low. In the case of a non-custodial crypto wallet, the entire information remains with the users. This reduces the possibility of data theft, unless the user shares the details with someone or their device is stolen.
  • Offline accessibility: To gain access to your funding and associated details, you must first log into your Custodial wallet and submit a request to centralized authority. This necessitates the use of internet connectivity. Non-custodial wallets do not have this requirement, so it is a better option to enjoy full blockchain development services in real-time.
  • Backup and recovery possibility: Self-custodial wallets or non-Custodial crypto wallets lag behind Custodial wallets in terms of backup and recovery capabilities. Custodial wallets keep the private key on their own. So, even if you lose access to data, you can regain it by contacting a third party.

As seen in the above comparisons, Non-Custodial wallets win over Custodial wallets. Furthermore, non-custodial transactions are typically faster because there is no need to wait for withdrawal approval. 

Non-custodial wallets don’t require you to have faith in a third party, but they do require you to have faith in your ability to keep your wallet and keys safe. (Source: Pixbay)

Non-custodial wallets have accessibility and usability issues as one drawback. They are typically less user-friendly and can be difficult for first-time cryptocurrency holders. Of course, you are solely responsible for your keys and must take your own precautions when handling them. This means that instead of relying on someone else to manage your finances, you must rely on yourself.

Which kind of wallet should you use for your cryptocurrency?

Both wallet types are suitable for storing your crypto assets. Most traders and investors employ both in various situations. However, you must ensure that the wallet you use supports the type of cryptocurrency you intend to store.

The wallet choice is determined by the investor’s experience. If you have enough safeguards in place to keep both the private keys and the seed phrase safe, and if recovering funds is part of your investment risk management, a non-custodial wallet is an option to choose.

If you are not familiar with computers and are only interested in Bitcoin for its monetary properties, then using a custodial wallet will not be a problem. You’re probably better off entrusting a third party to help you ensure that you don’t lose your entire investment, and as long as you use a trusted entity to store your funds, you shouldn’t have any major issues.

You should choose a non-custodial storage option if you are able to comprehend how to be accountable for your own cryptocurrency holdings. This will provide you permission-less transaction capabilities and total control over your cryptocurrency.

Properly storing your cryptocurrency is a critical aspect of investing. Instead of leaving security to chance, educate yourself on the various types of crypto security available and which wallets perform best in order to select the most secure crypto wallet for you. There are numerous security measures to consider before selecting a wallet, ranging from human error to hacking.

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George Schooling

George Schooling

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