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Custodial vs. Non-Custodial Wallet | Any difference? | Notum

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Intro

Once you're into crypto, imagining your life without a wallet isn't easy. You need one not just for storing crypto but also for providing advanced security measures to protect you from unauthorized access or fraudulent activities. Users can easily and securely manage their cryptocurrency portfolios with the right wallet. There are many types of crypto wallets, but they can all be divided into two main groups: custodial and non-custodial. At this point, understanding each type's pros and cons is essential. 

How Do Crypto Wallets Work?

Crypto wallets are digital wallets that enable users to store, send, and receive cryptocurrency. These wallets are stored on a blockchain, providing secure storage for cryptographically-signed transactions. Users have a private key or seed phrase to access the coins in a wallet.

When using crypto wallets, two types of wallet addresses can be used: public and private. A public wallet address is visible to all users on the blockchain and is usually used for receiving coins or tokens. On the other hand, a private wallet address is kept secret and is only known by its owner, who uses it to send coins or tokens.

  • The most crucial wallet element is a private key. A private key is like the key to your safety. Anyone with access to your private key can take control of the crypto.

Crypto wallets also allow users to keep track of their cryptocurrency transactions, ensuring that all transfers are secure and accurate. They can also provide users with additional features, such as monitoring the price of cryptocurrencies in real-time or setting up smart contracts to automate certain aspects of their transaction process.

Finally, crypto wallets may have advanced security measures such as multi-signature authorization, which requires several users to approve a transaction before it can be completed. This helps cut down the risk of fraudulent activities and ensures that all transactions are secure.

What Is a Custodial Crypto Wallet?

  • Crypto custody is a safe, off-chain storage solution that protects crypto funds or holdings from theft or loss. 

A custodial crypto wallet is a digital wallet that allows the user to store their cryptocurrency assets with an entity, such as an exchange or other third party. This means the user does not have complete control over their private keys, as they are held in trust by the custodian. This makes it easier for users to access and manage their holdings, as they do not have to worry about securely storing and managing their private keys. However, it also makes it more difficult for the user to take full ownership and control of their funds, as the custodian holds ultimate control over the assets. Additionally, users who store their assets in a custodial wallet risk losing them if the custodian is hacked or goes out of business. Therefore, it is crucial to assess a custodial wallet provider's security measures and track record before entrusting them with your cryptocurrency holdings.

Pros:

  • People who are new to cryptocurrency may find custodial wallets easier to use because they do not have to set up and manage their own wallet.

  • Many custodial wallets provide additional security measures such as two-factor authentication, which can help protect users from fraud and theft.

  • Custodial wallets typically charge lower fees than non-custodial wallets, making them a more affordable option for those who are just starting out in the cryptocurrency world.

Cons:

  • If the custodial wallet provider experiences a security breach or is hacked, users could lose all of their funds.

  • Users of custodial wallets do not have complete control over their own funds, which means that their transactions and other information may be shared with the wallet provider.

  • Custodial wallets are centralized, which makes them vulnerable to attack and manipulation. This can also lead to a situation where the wallet provider has complete control over user funds.

  • If the custodial wallet provider shuts down or becomes insolvent, users may not be able to access their funds. Therefore, it is important for users to do their due diligence and research the wallet provider before entrusting them with their funds.

  • Although custodial wallets may be cheaper in the short-term, they may end up costing more in the long run due to the lack of control users have over their own funds. Additionally, custodial wallet providers usually charge fees for using their services, which can add up over time.

  • Custodial wallets are considered financial institutions and may be subject to government regulations that could restrict their ability to provide services. This could lead to higher fees, more complexity, and other issues for users.

What Is a Non-Custodial Crypto Wallet?

  • A noncustodial wallet = you own and control the private keys (read 'funds and holdings') to your cryptocurrency.

Non-custodial crypto wallets allow users to manage full control over their digital funds. Unlike a custodial wallet, which an external third party manages, the user alone holds the private keys associated with non-custodial wallets. This provides maximum security and privacy when sending and storing crypto assets.

Unlike custodial wallets, non-custodial crypto wallets are much easier to set up and manage. Non-custodial wallets offer several advantages when it comes to cryptocurrency storage. The most important benefit is that users fully control their own funds. This eliminates the risk of someone else accessing their private keys and stealing their funds. Furthermore, non-custodial wallets are generally much more secure than custodial wallets.

Pros:

  • Non-custodial crypto wallets offer greater security than their custodial counterparts. Funds are stored in a secure environment, and users remain in full control of the private keys associated with those funds at all times. This eliminates the risk of any single entity having access to or control over your funds and allows you to easily make transactions or store your crypto securely.

  • These wallets are also more private than custodial wallets, as users do not need to give any personal information when setting up a wallet and can remain anonymous if desired. No KYC requirements makes these wallets perfect for those who wish to keep their financial activities private.

  • These wallets typically offer more advanced features than custodial wallets, such as the ability to customize fees and have multiple addresses for sending and receiving crypto. This allows users to tailor their experience to their individual preferences.

Cons:

  • Non-custodial crypto wallets can be more challenging to use than custodial wallets, as they require users to have a higher level of technical knowledge and understanding. This may be intimidating for those who are new to the world of crypto. 

  • These wallets often charge high transaction fees due to their lack of access to centralized resources such as exchanges, which can quickly add up in the long run.

  • Non-custodial wallets may also be less reliable than custodial wallets, as they are not backed by any single entity and could potentially be subject to malicious attacks or other forms of manipulation. It is important for users to remain sharp-eyed when using these wallets.

  • Lastly, non-custodial wallets are not insured in the same way that custodial wallets are, which means users are completely responsible for any losses that may occur. 

Wrap Up

What are your personal preferences and priorities? That defines the wallet’s type. While custodial wallets offer greater convenience and ease of use, they also come with the risk of losses due to hacks or other issues. Non-custodial wallets, while more secure, can require users to manage their private keys and take full responsibility for their funds.

Ultimately, it is up to the user to decide which wallet best suits their needs. Whichever you choose, make sure that you take steps to keep your funds secure and protect yourself from potential risks. Doing so will help ensure you get the most out of your cryptocurrency experience.