Today, people purchase cryptocurrency, and after that, they got confused while choosing custodial vs non-custodial wallet for storing their funds.
Control your own wealth or trust someone else to do it for you?
This is the question that many cryptocurrency investors ask themselves when it comes to storing their digital assets. As cryptocurrency gains more mainstream adoption, it is essential to know where and how to keep your digital assets safe.
The famous Bitcoin evangelist Andreas Antonopoulos once said,
“Not Your Keys, Not Your Bitcoin.”
This emphasizes the importance of owning your private keys, which are the only way to access your digital assets. 36% of respondents said they used non-custodial wallets for security reasons. While 33% said they use them for privacy reasons.
According to the report, the amount of Bitcoin held on exchanges has been steadily decreasing. indicating a growing trend towards self-custody and non-custodial wallet usage.
Why you should care about owning your private keys and which one is the right choice for you?
In this blog, you will get the answers related to these questions that help you with an informed decision about where to store your digital assets.
Without any further ado, let’s get started!
Non-Custodial and Custodial Wallet: Explained
Crypto wallets are broken into two different groups – custodial and non-custodial. With a custodial wallet third party has control over your private keys. Whereas with a non-custodial wallet, the user is solely responsible for his private keys and, therefore, has complete control over their assets.
Let’s deeply discuss further:
1. What Is a Non-Custodial Wallet?
A non-custodial wallet is a type of cryptocurrency wallet that allows users to have full control over their digital assets. without depending on third-party service providers to manage their funds.
Moreover, non-custodial wallets are decentralized and rely on the blockchain network to facilitate transactions. This is great when it comes to security and privacy, as they are not entrusting their funds to a third party.
Non-custodial wallets also come with added responsibility. The big pain is that the user must keep their private keys secure. Losing them can result in the permanent loss of their digital assets.
Overall, non-custodial wallets offer a more secure and decentralized way to store and manage digital assets. But it also requires a higher level of technical knowledge and responsibility from the user.
Pros and Cons of Non-Custodial Wallet:
| Pros | Cons |
| Users have complete control over their digital assets | Requires users to manage their own security and backup |
| Private keys are not held by a third-party service provider, reducing the risk of hacking and security breaches | Can be less convenient to use than custodial wallets |
| Offers greater privacy as personal information is not required | Users may lose access to their digital assets if they lose their private key |
| No fees are charged for managing the digital assets | may require technical knowledge to use and manage |
| can support a wide range of cryptocurrencies and tokens | Limited or no user support is offered |
Examples of Non-Custodial Wallets:
- MyEtherWallet
- Ledger Nano S
- Trezor
- Trust Wallet
- Exodus
2. What Is a Custodial Wallet?
A custodial wallet is a type of cryptocurrency wallet where a third-party service provider, such as a centralized exchange. Hold the user’s private keys and manage their digital assets on their behalf.
In other words, the user’s funds are held in the custody of the service provider. When using a custodial wallet, the user typically creates an account with the service provider and deposits digital assets into that account.
Moreover, the service provider then manages the user’s assets which can include buying and selling cryptocurrencies, transferring funds to other users, and storing the assets securely.
Risk related to custodial wallet: User is not in complete control over their digital assets. If their service provider is hacked or goes bankrupt, the user’s funds may be at risk.
Pros and Cons of Custodial Wallet:
| Pros | Cons |
| A convenient way to store and manage digital assets | Vulnerable to hacking and security breaches |
| Easy accessibility from any device with an internet connection | Users are not in complete control of their digital assets |
| Many custodial wallets offer user support and customer service | Personal information may be required, compromising privacy |
| Some custodial wallets offer additional services such as trading, lending, and staking | Custodial wallets may charge fees for their services |
Examples of Custodial Wallets:
- Coinbase wallet
- Binance
- BitPay
- Block Fi
With this out of the way, let’s see the differences between custodial and non-custodial in the section below.
Difference Between Custodial and Non-Custodial
What are the major differences between custodial and non-custodial wallets? As such, there are many. So, if you are planning crypto wallet development or using one in your day-to-day life, it’s a good idea to know what the major differences are.
Therefore, in this section of the blog, we shall be discussing all the major points of custodial vs non-custodial wallets. These are, as mentioned below:
1. Private Key Management
For those who don’t know about private keys, they are a series of randomly generated numbers and letters that are used to access and control a user’s cryptocurrency funds.
This is very important. So much so that they are the very first thing we compare between custodial vs non-custodial wallets.
Starting with custodial wallets, the private keys in this case are managed by a third party. On the other hand, when it comes to non-custodial ones, it resides with the user.
For this reason, creating non-custodial blockchain wallets is considered a better option when you think of creating users who can create their own banking system.
2. Custodial vs Non-Custodial Security
If you want to build a digital wallet for the business, security is one of the foremost considerations. And this remains true when we are talking about custodial wallets and noncustodial wallets.
Custodial online crypto wallet wallets use hot and cold storage to store sensitive data. And unfortunately, they are often prone to hackers. So, you can’t expect great security from custodial.
Moving on to the flip side of a non-custodial crypto wallet, the entire information remains with the user, locally. Therefore, there is little to no chance of data leaking.
As such, the only chance of data being used is when the user shares it willingly. So the answer is clear: non-custodial wallets are unmatched when it comes to security.
3. Recovery Options
This is yet another important factor to consider when speaking of custodial vs non-custodial wallets. So, without further ado, let’s get right into it:
Starting with the self-custodial wallet (non-custodial), they aren’t that strong in recovery options. The reason is that all of the data is stored with the user. So if there’s damage to the device or it’s deleted from the storage, there is no chance of recovering it.
On the other hand, since when it comes to the custodial wallet, the private keys are sent to a third party. Therefore, if there is an issue, if the user changes the device, they can regain access in no time.
This makes the custodial wallet a clear winner when it comes to custodial vs non-custodial wallet user experience.
4. User Experience
One of the main advantages of a custodial wallet in a custodial vs non-custodial wallet is convenience. Since the provider is managing your keys, you don’t have to worry about keeping them safe yourself. This makes it easy to access your funds and make transactions quickly.
However, this convenience comes at a cost. Because you don’t have control over your keys, you essentially trust the provider to keep your assets safe. If the provider is hacked or goes bankrupt, you could lose all of your funds.
On the other hand, non-custodial wallets offer much greater security. Because you control your own keys, you don’t have to rely on a third-party provider to keep your assets safe. This makes it much less likely that your funds will be stolen or lost.
However, this security comes at the cost of convenience. Managing your own keys can be a complicated process, and if you lose your keys, there’s no way to recover your funds.
5. Transaction Type
So, in the custodial vs non-custodial wallet debate, one important factor is transaction type. Custodial wallets are managed by a third party, while non-custodial wallets give the user complete control.
With a custodial wallet, the third party executes transactions, while with a non-custodial wallet, the user executes transactions themselves.
The choice between a custodial and non-custodial wallet depends on the user’s priorities. A custodial wallet is best for ease of use, while a non-custodial wallet is better for security and control.
6. Future Scope
Custodial wallets will become more secure and user-friendly. Wallet providers will increase their security measures to ensure that users’ funds are safe.
Additionally, custodial wallets will become more user-friendly and easier to use. This will make them more accessible to the masses, which will increase the adoption of cryptocurrencies.
Non-custodial wallets will become more decentralized and interoperable. In the future, non-custodial wallets will be able to interact with each other seamlessly.
Moreover, this means that a user will be able to transfer their funds from one non-custodial wallet to another without any problem. Additionally, non-custodial wallets will become more decentralized, which means that users will have complete control over their funds.
Bottom Line
So, which type of wallet is right for you? It depends on your individual needs and priorities. If convenience is your top priority, a custodial wallet may be the best choice for you. But if security is your main concern, a non-custodial wallet is definitely the way to go. If you want to develop your own, we highly recommend that you consult an eWallet App Development Company.
FAQ
Coinbase is a custodial wallet. This means that Coinbase holds the private keys of its users.
Udai Singh is a senior content writer with over 6 years of experience in creating content for FinTech, eWallet, EdTech, and App Development. He is an expert in simplifying complex concepts and creating engaging content that resonates with the audience.
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