What are the differences between custodial and non-custodial wallets?

Have you ever thought about how your cryptocurrencies are stored and where they are stored? Token holders can use many different types of cryptocurrency wallets to store their digital assets. Cryptocurrency wallets are generally divided into two main categories: custodial and non-custodial.

Custodial wallets (such as those in the crypto custody industry) are services that hold users’ private keys and safeguard assets on their behalf. Regular accounts in the crypto industry are also a type of custodial wallet. Conversely, if you use a non-custodial wallet, you have full control over your assets. MetaMask and the Binance Chain Wallet are typical examples of non-custodial wallets.

Both custodial and non-custodial wallets have their advantages and disadvantages. Next, we will introduce the differences between the two to help you understand which type of wallet is suitable for different scenarios.

Introduction

If you have used Bitcoin or other cryptocurrencies, you know the importance of digital wallets. Completing transactions, trading on cryptocurrency exchanges, or using blockchain applications all rely on digital wallets. Therefore, you must understand how cryptocurrency wallets work and the main differences between custodial and non-custodial wallet providers.

How Cryptocurrency Wallets Work

A cryptocurrency wallet is a tool that interacts with the blockchain network. In addition, you can use it to send and receive cryptocurrencies or access decentralized applications(DApp).

Technically, cryptocurrency wallets do not actually store digital assets. Instead, they generate the information needed to use cryptocurrencies. Nevertheless, for beginners, most users still use the term “storage,” and this article will continue to use that terminology.

Additionally, cryptocurrency wallets consist of two main components: a public key and a private key.

If someone wants to send you cryptocurrency, they can do so by using an address generated from your wallet’s public key. At this point, your wallet address and public key can be shared with others (hence the term “public key”).

In contrast, the private key is a confidential password that signs transactions and grants access to funds. As long as the private key remains secure, you can access your cryptocurrencies from any device.

Although cryptocurrencies are digital products, the form of wallets holding private and public keys varies—keys can be printed on paper, accessed via desktop wallet software, or stored offline on hardware wallet devices.

Some wallets can also store and transfer NFTs, which are non-fungible tokens issued on the blockchain.

Regardless of your choice, it falls within the scope of either custodial or non-custodial cryptocurrency wallets.

What is a custodial cryptocurrency wallet?

As the name suggests, a custodial cryptocurrency wallet is a wallet that holds your assets. This means a third party holds and safekeeps your private keys on your behalf. In other words, you do not have full control over your funds and cannot sign transactions yourself. Using custodial cryptocurrency wallet services is not necessarily a bad thing.

In the early stages of Bitcoin’s development, all users had to create and manage their own wallets and private keys. While “acting as your own bank” has many benefits, inexperienced users may find it difficult to get started and may even face risks. If the private key is stolen or lost, you will permanently lose access to your cryptocurrency assets. Blockchain analysis reports indicate that over 3 million BTC may be lost forever.

Some cryptocurrencies cannot be retrieved through inheritance because only the original owner holds the private key. You can share access to your assets with the custodian to avoid such incidents.

Even if you forget your cryptocurrency exchange platform password, you can still contact customer service to recover your account and assets. If you use a non-custodial wallet, you must carefully safeguard your cryptocurrencies.

Therefore, custodial wallet services are more suitable for most users. However, this means your private keys are entrusted to a third party. Choosing a reliable trading platform or service provider is crucial.

When researching custodial service providers, consider whether they are regulated, the types of services offered, how private keys are stored, and whether insurance is provided.

For example, crypto custody services are regulated and compliant, providing standard insurance for enterprise crypto accounts. They can also offer crime insurance and other customized coverage upon request. Crypto custody services also use multi-signature wallets(multisig), which require multiple parties to approve cryptocurrency transactions before execution, eliminating centralized risk.

What is a non-custodial cryptocurrency wallet?

A non-custodial cryptocurrency wallet is one where only the holder controls the private key. This type of wallet is suitable for users who want full control over their funds. Without intermediaries, you can directly transact cryptocurrencies from your wallet. This is a good choice for experienced traders and investors who know how to safeguard and protect private keys and seed phrases.

When interacting with decentralized exchanges(DEX) or decentralized applications(DApp), you need to use a custodial wallet. Uniswap, SushiSwap, PancakeSwap, and QuickSwap are typical decentralized exchanges that require non-custodial wallets.

Trust Wallet and MetaMask are typical non-custodial wallet providers. Using such wallets, you are responsible for the security of your seed phrase and private keys.

Comparison of custodial and non-custodial wallets

Advantages and Disadvantages of Custodial Wallets

As mentioned earlier, the main disadvantage of custodial wallets is that funds and private keys must be entrusted to a third party. In most cases, these service providers require identity verification(KYC). The advantages are security and ease of use. You do not need to worry about losing your private keys and can contact customer support if problems arise.

When using custodial services, be sure to choose a reputable company that offers insurance and has trustworthy security measures. Also, look for regulated and compliant custodians.

Some crypto custodians may impose additional requirements that you might not meet. For example, crypto custody services are currently only open to enterprise clients. Please read the FAQ of the crypto custody service for more details.

Advantages and Disadvantages of Non-Custodial Wallets

Non-custodial wallets are free from third-party oversight, allowing users to have full control over their keys and funds. In other words, ownership of assets is in your hands, and you can act as your own bank. Additionally, non-custodial transactions are often faster, without waiting for withdrawal approval. Finally, if there is no custodian, no additional custody fees are incurred. These fees can be very expensive, depending on the service provider.

As we know, non-custodial wallets may lack accessibility and ease of use. Their operation can be complicated, often causing trouble for first-time cryptocurrency holders. As non-custodial service providers continue to develop, these issues are expected to be addressed.

Of course, you must also take full responsibility for your keys and take precautions when safeguarding them. This means trusting yourself rather than entrusting funds to others.

To protect your cryptocurrencies and prevent hacking, consider the following security measures:

Use strong passwords.

Enable two-factor authentication(2FA) for added protection.

Be vigilant against scams and phishing attacks.

Be cautious when clicking links and downloading new software.

Which type of wallet should I use for cryptocurrencies?

Both types of wallets are suitable for storing cryptocurrency assets, including NFTs. Most traders and investors choose flexibly based on different situations. However, the wallet you choose must support the cryptocurrencies you wish to store. Their storage methods may differ.

Different blockchain networks operate various types of cryptocurrencies. We can classify these types based on token standards, but multiple blockchains under different standards can run the same token. For example, you can find BEP-20 BNB on Binance Smart Chain and BEP-2 tokens on Binance Chain.

Here are the most common token standards:

Binance Smart Chain: BEP-20, BEP-721, BEP-1155

BNB Chain: BEP-2

Ethereum: ERC-20, ERC-721, ERC-1155

Solana: SPL

MetaMask, Trust Wallet, and MathWallet are non-custodial wallets that support the most common and popular cryptocurrencies. If you are unsure which tokens your wallet supports, please refer to their official FAQs or documentation for details.

Major wallets are continuously upgrading to support more tokens based on user needs. For example, the crypto custody industry currently supports BTC, ETH, BCH, LTC, BUSD, BNB, CAKE, and many other ERC-20 tokens. Crypto custody providers will gradually include more token types to meet user demands.

Summary

Should you choose a custodial wallet or a non-custodial wallet? Most cryptocurrency users use both types of wallets, but it depends entirely on personal needs. If you want full control over your assets or only want to interact with blockchain technology and DeFi applications, consider using a non-custodial wallet. Conversely, if you are looking for a service provider that can meet your storage needs during trading or investing, focus on trustworthy custodial wallet providers.

Remember, whether you use a custodial or non-custodial wallet, always exercise caution and implement the best security practices to safeguard your funds. ($UMA** **$ZEC