We want you to imagine your crypto assets as valuable treasures in a virtual vault. How you safeguard and access that vault depends on the type of wallet you choose.
Custodial wallets are like centralized banks, holding your assets and keys while managing transactions for you. On the other hand, non-custodial wallets put you in the driver's seat and hand the keys to you, granting you full control and responsibility.
Let's unpack the differences between these two so you can confidently choose one that aligns with your goals.
Key facts
- A custodial wallet is a service that holds your assets in custody and controls the private key to your wallet. Your regular Coinbase account also functions as a custodial wallet.
- When you use a non-custodial wallet, you have complete control over your assets.
- Non-custodial wallets include online non-custodial wallets like MetaMask and hardware wallets like Tangem Wallet.
- Both custodial and non-custodial wallets have advantages and disadvantages.
How do cryptocurrency wallets work?
A cryptocurrency wallet is a software or hardware medium that allows you to interact with a blockchain network. Technically, crypto wallets do not store your digital assets. Instead, they generate the data required to use crypto.
A crypto wallet consists of two main elements: public and private keys.
People can send cryptocurrency to one of your addresses, which are generated by your wallet's public key. Your wallet addresses and public key are visible to everyone.
Your private key, on the other hand, functions similarly to a secret password in that it signs transactions and grants access to your wallet. While cryptocurrencies are digital, you can print your private and public key crypto wallets on paper, accessed via desktop apps, or stored offline in hardware wallet devices.
Some wallets also allow you to store and transfer non-fungible tokens (NFTs) issued on a blockchain.
What is a custodial cryptocurrency wallet?
A custodial crypto wallet is one in which your assets are held in custody for you. This means that your private keys will be held and managed by a third party on your behalf.
In other words, you will not have complete control over your funds or be able to sign transactions.
While "being your own bank" has many advantages, it can be inconvenient and difficult for inexperienced users. If your private keys are compromised or lost, you will permanently lose access to your crypto assets.
Why custodial wallets are popular
There have also been cases where crypto inheritance was unrecoverable because the original crypto owner only held the private keys. You can avoid such incidents by sharing access to your assets with a custodian.
Even if you lose your cryptocurrency exchange password, you should be able to access your account and assets by contacting customer service. If you use a non-custodial wallet, you are responsible for keeping your cryptocurrency safe.
As a result, it makes sense to use a custodial wallet service. This, however, implies that you are entrusting your private keys to a third party. That is why it is critical to select a reputable provider.
When researching custodial wallet providers, ensure they're regulated, and learn how your private keys are stored and whether there is insurance coverage.
What is a non-custodial cryptocurrency wallet?
A non-custodial crypto wallet is one in which only the holder can access and control the private keys. Non-custodial wallets are the best option for users who want complete control over their funds.
It's a good choice for seasoned traders and investors who understand how to manage and safeguard their private keys and seed phrases.
Popular decentralized exchanges (DEX) that require a non-custodial wallet include Uniswap, SushiSwap, PancakeSwap, and QuickSwap.
Non-custodial wallet providers include Trust Wallet and MetaMask. However, you're solely responsible for your seed phrase and private keys' security when using these wallets.
Self-custodial wallet vs. non-custodial wallets
The key difference between a self-custodial (self-hosted or self-sovereign) wallet and a non-custodial wallet lies in the degree of control over private keys and how they store digital assets.
Self-custodial wallet
A self-custodial wallet is a type of cryptocurrency wallet where the user has complete control over their private keys and the storage of their digital assets. It's often considered the most secure form of wallet because the user is not reliant on any third-party service for key management.
Self-custodial wallets are highly safe if the user follows best practices for wallet security and employs robust safety measures. Examples include hardware wallets like Tangem Wallet and paper wallets.
Non-custodial wallet
A non-custodial wallet is a type of cryptocurrency wallet where the user retains control over their private keys, but the wallet service provider assists in management and often facilitates transactions.
While users control their private keys, the wallet service provider can offer additional features like backup and recovery options. The level of security may vary depending on the provider's security measures.
Users are still susceptible to potential breaches on the platform. Popular examples include MetaMask, Trust Wallet, and Binance Chain Wallet.
In summary, the fundamental difference is in the level of control and responsibility over private keys. Self-custodial wallets grant users complete ownership, making them highly secure but also demanding in terms of user responsibility. Non-custodial wallets, while still secure, offer additional services and may be more user-friendly.
The benefits and drawbacks of custodial wallets
The main disadvantage of custodial wallets is that you must entrust your funds and private keys to a third party. These service providers will almost always require identity verification (KYC). You will also have to worry about losing your funds if this third-party provider is hacked.
When using custodial services, search for a reputable company with high security and insurance coverage. Keep an eye out for regulated and compliant custodians.
The benefits and drawbacks of non-custodial wallets
Non-custodial wallets provide you with complete control over your keys and funds without a third-party guardian. In other words, you own your assets and can be your own bank. Furthermore, non-custodial transactions are typically faster because there is no need for withdrawal approval. If you don't use a custodian, you avoid paying extra custodial fees, which can be expensive depending on your service provider.
A disadvantage of using non-custodial wallets is their accessibility and ease of use. They are typically less user-friendly and can be difficult for first-time cryptocurrency holders.
With non-custodial wallets, you're solely responsible for your keys and must take your own precautions when handling them.
Custodial vs. non-custodial wallets: comparison table
We provided this table to outline key features and differences. Remember to conduct your own research and choose a wallet that best suits your specific preferences.
Feature | Custodial Wallets | Non-Custodial Wallets |
|---|---|---|
Control | Third-party controls your funds and private keys | You have full control over your funds and private keys |
Security | Averagee. Depends on the service’s approach to crypto security. | Reliant on user's security practices |
Accessibility | Easy, user-friendly interface | Requires some technical knowledge |
Backup | Managed by the custodial service | Users are partly responsible for backups |
Recovery | Service may assist in recovery | Users are solely responsible for the recovery |
Transaction Speed | Generally faster | May be slower due to user authentication and verification |
Privacy | Limited. Custodial services often track user data | Higher level of privacy |
Regulation | May comply with specific regulations | User's responsibility and choice to follow regulations |
Risk of Hacks | Higher risks of hacking as it's a centralized target | Lower risk of hacking as funds are in the user's control |
Examples | Coinbase, Binance, Kraken, Gemini | MetaMask, Trust Wallet, Exodus |
Here are some security measures to secure your crypto and protect yourself from hackers when using a custodial wallet:
- Using a secure password.
- Enabling multi-factor authentication (MFA).
- Maintaining vigilance against scams and phishing attacks.
- Be cautious when clicking links and downloading new software.
Which wallet should I use for my cryptocurrency?
Both wallet types are suitable for storing crypto assets, including NFTs. Most traders and investors use both in various situations. However, you must ensure that your wallet supports the cryptocurrency you intend to store. Remember that the same tokens may be available on multiple blockchains under different networks.
Non-custodial wallets accept the most common and popular crypto assets. If you are unsure which tokens your chosen wallet supports, consult their official FAQ or documentation.
Non-custodial wallets that are constantly upgrading to meet the demands of their users may eventually support more tokens.
Final thoughts
Is it better to use a custodial wallet or a non-custodial wallet? Most cryptocurrency users use both, but it all depends on your preferences. If you want complete control over your assets, use a non-custodial wallet.
But if you want a service provider to handle your storage needs while you trade or invest, you can look for reputable custodial wallet service providers.
Remember that whether you use a custodial or non-custodial wallet, you should always be cautious and follow best practices to protect your funds.