What’s the difference between a custodial and a non-custodial wallet?

In the case of a custodial wallet, the exchange you choose to create the wallet has complete access to the private keys. As a result, a third party controls your crypto assets stored in the wallet. A custodial wallet is a crypto wallet solution wherein a custodian retains access to your private keys and takes care of private key security on your behalf. This also means that the custodian has complete control over your funds — hence the phrase “Not your keys, Not your crypto.”.

It is the user’s responsibility to secure their assets and understand the inherent risks, including technical issues, evolving regulations, third-party hacks, and market volatility. Digital assets are not recognized as legal tender, and transactions involving them may be irreversible. Before using the platform, users are urged to carefully evaluate these risks. Users must trust wallet providers to play their part and store assets without malicious intent. Recently, discoveries showed how the now-defunct FTX exchange used customer funds stored in its custody wrongly. Custodial wallets employ third-party actors to hold users’ funds in custody.

Security aspects

While custodial wallets offer a smooth user experience, non-custodial wallets have, in contrast, a less-friendly customer experience. They are not easy to use, especially for new users or people new to crypto. Although, it is essential to note that new self-custodial wallet solutions offer a user-friendly experience.

With custodial vs non-custodial exchange, the first time you purchase crypto, it is likely that it will end in a custodial exchange online crypto wallet. Now let’s dive into the understanding of Custodial vs. Non-Custodial wallets part where the advantages and disadvantages of both the crypto wallets are discussed. Whereas, in case of Non-Custodial crypto wallet comparison, the whole information remains with users. This reduces the risk of data being stolen, unless the user shares the details with someone, or their device gets stolen. But before we jump to the part where we look into the Custodial vs. Non-Custodial comparison, let’s uncover the basics of both the blockchain wallet types, starting with Custodial Wallets first. The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price.

Disadvantages of custodial wallets

If you currently hold any cryptocurrency, you’ve probably already interacted with a crypto wallet before. But a crypto wallet isn’t like a regular wallet in which you’d hold your credit cards and cash. It’s a common misconception that crypto wallets store or contain a user’s cryptocurrency holdings.

Users need to be extra responsible with non-custodial wallets because losing one’s private keys means losing their funds forever. Apart from the seed phrase, there is no way to restore an account if a user loses their password. Sometimes the user interface of non-custodial wallets can also seem a bit overwhelming for new users. Non-custodial wallets are more flexible because they can usually operate both online and offline. A non-custodial crypto wallet can function from a web browser or a mobile application. A hardware wallet is the safest, however, because users can sign transactions offline, thereby protecting keys from malicious hackers.

Our technology/platform stack for blockchain development

While choosing a non-custodial wallet, always go for reputed ones like Ledger, Tangem, Trust Wallet, MetaMask, etc. Moreover, look for Evaluation Assurance Level (EAL) ratings of at least EAL6 for hardware wallets. In the case of software wallets, check for audit reports by reputed firms like Halborn, Certik, and Hacken. Choose a reputed crypto exchange that has been in the crypto space for a while. It’s best to choose prominent exchanges with proof of reserves, which adds a certain degree of guarantee for your assets in case of events like bankruptcy.

Using a hardware wallet that functions offline can further reduce security vulnerabilities. A non-custodial wallet is a wallet that lets you keep your keys in your custody. Non-custodial wallets let you become your own bank – independent of any intermediary. Unlike custodial wallets, the non-custodial wallet provides complete control over your holdings. In crypto, whoever holds access to private keys is the only true owner of the cryptocurrencies and digital assets.

Custodial vs. Non-Custodial Wallets: Understanding the Difference Points

Custodial wallets do not come out nicely in the difference between custodial and non-custodial wallets in terms of access to funds. Crypto owners would definitely perceive some risks in trusting third-party applications with their valuable crypto assets. However, popular custodial wallets such as Binance and Coinbase have successfully earned the trust of crypto users. If you don’t want to take the trouble of safeguarding your private keys from unauthorized access, custodial wallets might be the right pick for you. On the contrary, experienced traders with technical know-how of backing up and restoring their wallets could choose non-custodial wallets.

In this article non-custodial in the context of blockchain wallet means a type of wallet that permits users to own their private key, which are in encrypted storage. So, even if you lose your private key or forget the mnemonic phrase, it is easy to regain access to your wallet and your stored funds. There are several different types of crypto wallets to choose from, but the two main varieties can be broken out as custodial wallets and non-custodial wallets. One of the main differences in cryptocurrency wallets is whether they are custodial or non-custodial.

Non-Custodial Wallets vs Custodial Wallets: Know the Difference

There are pros and cons to keeping your crypto assets in different types of wallets, so it’s up to you to decide on the right mix of convenience and security for your funds. Most custodial wallets require customers to go through identity verification exercises. Some users may not feel inclined to submit confidential information to these services, citing privacy concerns. Familiar with the distinct categories of crypto wallets such as custodial and non-custodial wallets?

• However, non-custodial wallets are not as easy to use as custodial wallets.
• The wallet user has to be accountable for the security of their private keys, thereby implying the need for knowledge on secure backup of a wallet.
• A beautiful feature of cryptocurrency is that each user is free to decide how to hold crypto for themselves.
• For example, to use Binance’s non-custodial wallet, it’s mandatory to create an account with the exchange by providing the required documents and completing the necessary verifications.
• One of the significant benefits of custodial wallets is that they incur zero transaction charges.

Let’s move one step ahead and understand the differences between the two i.e. This is a public-facing data point like your home address and is used to receive inbound cryptocurrencies and encrypt outbound transaction data. When depositing crypto into a wallet, you simply input the public key as the deposit address. This is similar Bitcoin And Crypto Faucets Listing to using your handle in a service such as Venmo or CashApp. Generally speaking, a virtual assets wallet is a vehicle, the main activity of which is to help its user to store their virtual assets (in certain cases, fiat currency). It should be noted that the right words here are exactly “to help to store”, but not “to store”.

Cons of Custodial Crypto Wallets

A beautiful feature of cryptocurrency is that each user is free to decide how to hold crypto for themselves. Mark contributions as unhelpful if you find them irrelevant or not valuable to the article. Custodial wallets often function as financial intermediaries, which subjects them to regulatory frameworks similar to traditional financial institutions. Compliance requirements may include Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations. Even the tiniest of mistakes could lead to robbery, deletion, or unplanned consequences.

What are cryptocurrency exchanges and how do they work?

Although they are not entirely private, non-custodial wallets do better at helping users buy and sell crypto without compromising their privacy. Self-custodial wallets do not require you to create an account with them, pass a KYC test, or engage in any other activity that may reveal your identity. Instead, you must sign a transaction, send coins to a particular address, pay a transaction fee, and connect your wallet to an application before spending your crypto. They hold the private keys that give you access to pay, move, and own those assets. Non-custodial wallets are one step ahead in the custodial vs non-custodial wallets comparison for ease of creating accounts.