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Custodial vs. Non-Custodial Wallets: What's the Difference?

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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 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 wallet?

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A custodial wallet is a type of cryptocurrency wallet where a third party— a centralized service or platform—controls the private keys used to access and manage the cryptocurrencies stored in the wallet. This means that the custodian (the third party) is responsible for the security and management of the funds.

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 wallet?

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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 managing and safeguarding 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

There's no difference between a self-custodial (self-hosted or self-sovereign) wallet and a non-custodial wallet.

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 considered the most secure type of wallet because the user does not rely on any third-party service.

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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.

Disadvantages 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.

Pros and cons 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.

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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

Average. Depends on the service’s approach to crypto security.

Enhanced. Relies on the user's security practices

Accessibility

  Easy, user-friendly interface

Requires some technical knowledge

      Backup    

Managed by the custodial service  

Users are responsible for backups  

Recovery

Service may assist in recovery

Users are solely responsible for recovery options

Transaction Speed

Generally faster

It 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

 There are higher risks of hacking because it is a centralized target

There is a 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 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.