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What is Custodial and Non-Custodial Crypto Wallet?

Understanding of Custodial and Non-Custodial Crypto Wallet, and the difference between them We are here to understand what is custodial and ...

Understanding of Custodial and Non-Custodial Crypto Wallet, and the difference between them

We are here to understand what is custodial and non-custodial crypto wallet? And what are the differences between them? And which one is the best? We will understand everything one by one.

Custodial-And-Non-Custodial-Wallets


But before understanding custodial and non-custodial crypto wallets, let's look at cryptocurrency wallets.

The cryptocurrency wallet stores the public and private keys that are needed to purchase bitcoin or other cryptocurrencies, and it provides a digital signature securely authorizing each transaction.

Crypto Wallets can be classified into 2 parts, one is Custodial Wallet and the other is Non-Custodial Wallet. Before using these wallets it is very important for us to understand the difference between these two wallets.

As the word custody describes itself "to be in charge of someone or something for their safety".

Therefore, custody means who has the custody of your private keys. And in crypto wallets, the private key is the cryptographic key by which users can access their assets.


Understanding A Custodial Wallet:

Custodial wallets are wallets where you do not have a private key. In a custodial wallet, most of the time the private key is with the exchange you are trading on or the company that is the creator of the wallet, or with a third party.

Since the private key is held by a third party, you have limited control over your funds or assets. If you are careless about things then it can be beneficial for you. If you are forgetful by nature, the guardian in this case can give you a greater chance of not losing your private keys.

But if you are able to take care of your private keys yourself, in this case you have a disadvantage of not having control over your own money or assets. If the exchange is hacked by chance, your crypto coins are hacked and there is no chance of getting it back.

It is just like a bank that controls your money, in a custodial wallet too, control of crypto assets is in the hands of another company that owns your private key.

Now it is up to you which type of wallet you prefer custodial wallet or non-custodial wallet. The choice is yours, but compared to non-custodial wallets, custodial wallets are less secure and preferred.

But custodial wallets are more preferred for beginners as they are more ideal and more accessible to them.

The example of custodial wallets are as under:

Trusted-Custodial-Wallets


Now Understanding A Non-Custodial Wallets:

Since we have understood custodial wallet, now understanding non-custodial wallets is even more easier.

Reputed-Non-Custodial-Wallets


In a custodial wallet, you had less control over your assets or funds, but in the case of a non-custodial wallet, you have complete control over your assets, as the private key is with you and not a third party.

Since there is no central entity managing passwords or keys in a custodial wallet, the users themselves are responsible for keeping these items secure and available. To recover the non-custodial wallet, users are provided with seed phrases of 12 to 24 random words. Users should be very careful in writing the seed phrase and keeping it safe. Because if the user's computer or hard drive or any device is broken in any way, using these seed phrases, the wallet can be recovered and re-uploaded.

In this case the private key is stored on your own device. And you have to take care of it. It would be better to take a backup of it and keep it somewhere else in a safe place.

Types of Non-Custodial Wallets are as under:

Web Wallets:

In the Web Wallet, your private keys are stored on the web browser.

Mobile Wallets:

There are application which are downloadable on your device that is on your mobile, or tablet.  Here  the private keys are stored on your device.

Desktop Wallets:

Desktop Wallets are downloaded and installed on your laptop or computer, and the private keys are too stored on your laptop or computer.

Example of Desktop Wallet is Exodus.


Paper Wallets:

In this you have a piece of paper which holds your public as well as private keys.  Since the storage system is offline, you have a freedom to access your crypto using any device by entering your keys.

It is almost obsolete in use, because of many reasons like wear-and-tear, damage, as a piece of paper which can be easily lost.  If you have an old paper wallet, and your crypto is stored there, it is advisable to convert it into a hard wallet.

Hardware Wallet:

Hardware wallets are physical devices that look like a USB flash drive, which ensures the most secure crypto storage system.

There is potential for fraud, even though non-custodial wallets are considered a more secure option. So beware of fake smartphone apps, downloadable applications and wallets.

Hardware wallets, which are considered the most secure crypto storage, can sometimes be infected with malware.

The most secure hardware wallets are as follows:
1) Trezor and
2) Ledger.


Custodial vs Non-Custodial Wallet:

See the difference between custodial and non-custodial wallet below.

Custodial-vs-Non-Custodial-Wallets


1) Security Purpose:

Custodial Wallet – Since most custodial wallets store user funds in a secure, in-built wallet; But there are chances of hacking as they are mostly online. It so happened, Cryptopia, Mount Gox are exchanges from where millions of dollars have been stolen and users are yet to be recovered.

Non-Custodial Wallet – In this you are the boss to keep your private keys with you, which is theoretically the most secure. But by chance if you lose your seed phrase, so does your funds, because you will never be able to access it without your seed phrase.


2) User Convenience:

Custodial Wallet – It is very convenient for the users as the web-based custodial wallet is designed in such a way to provide a user-friendly interface to the user.  A custodial wallet users can trade on the respective exchanges instantly.

Non-custodial wallet – Whereas, a non-custodial wallet requires you to manually transfer your funds or assets on and out of centralized exchanges. Since hardware wallets are mostly offline, withdrawing your funds or assets requires some additional steps.


3) Recovery mode:

Custodial Wallet – Since Custodial Wallets are tied to an individual's Platform account on crypto exchanges; If you forget or lose login information, in this case your account can be recovered through a standard website password recovery feature.

Non-Custodial Wallet – On the other hand, if you lose your private key and seed phrase for a non-custodial wallet, you lose all access to funds because you are the only one who holds the private key and seed phrase with you.


4) KYC Process:

Custodial Wallet – To access the Custodial Wallet, the user has to follow various KYC and AML procedures while creating an account with the service provider. Without which the user cannot do any transaction. Because KYC is required for security purposes which can be a time consuming process.

Non-Custodial Wallet – Here in a non-custodial wallet, users do not require any KYC process, therefore users can remain anonymous.


5) Control over funds:

Custodial Wallet – Since the user of the Custodial Wallet does not allow the private key to be held and hence the control over the funds or assets is in the hands of the Wallet Provider.

Non-Custodial Wallet –Whereas a non-custodial wallet has full control over the funds or assets as the private key is with the users.



Which is the best one- Custodial or Non-Custodial Wallet?

Now it's upon you, as what type of wallet suites for your needs and habits.  Because both the wallets have its own limitations and benefits.  The user is the ultimate who decide which is the best as per their requirements.

As we know the custodial wallet is very quick to process the transactions, and if someone who is trading cryptocurrencies on daily basis, might require it.

But if some holders want to hold crypto coins for a longer period with the aim of better returns, they can go with non-custodial wallets. This way they can be assured that their funds or assets are under their complete control and the chances of hacking are equal to zero.

In the case of custodial wallets, it can be said that "not your keys, not your coins" but at the same time users can theoretically recover their funds if they lose access to their login credentials.

But this is not the case with non-custodial wallets, where users have to bear full responsibility for any loss or theft.

Now it is up to you which wallet is right for you, so before choosing the best one, take your time to select the best one, and don't be in a hurry.



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