What Is A Custodial And Non-Custodial Wallet?
If you’ve ever used bitcoin or other cryptocurrencies, you know that having a digital wallet is a must. If you want to transact, trade on a crypto exchange, or use a blockchain application, you will need it. Therefore, it is important to understand how cryptocurrency wallets work and the main differences between non-custodial and custodial wallet providers.
What is a Custodial Crypto Wallet?
A custodial wallet is defined as a wallet in which the private key is held by a third party. Meaning, third parties have complete control over your funds while only allowing you to send or receive payments. Another important aspect of a crypto wallet is the use of two different types of keys, namely the public key and the private key. You can share the public key with anyone, while the private key is like a password to lock your assets securely. You should protect your private key at all costs as it opens up access to all your crypto assets and tokens.
What is a non-custodial crypto wallet?
The setbacks in custodial wallets serve as fuel for the debate over custodial versus non-custodial wallets. Not only are non-custodial wallets an alternative to custodial wallets, but they are also a great example of introducing complete decentralization. A non-custodial wallet commonly known as a decentralized wallet is a crypto wallet that delegates control of its private keys to users. Only the user can use crypto held in a non-custodial wallet, thereby presenting a favourable value to the users in terms of ownership. In addition, non-custodial wallets also assure better security of your cryptocurrencies.
Pros & Cons of Custodial Wallets
If computer security is not your strong point, it is better to let a third party secure your crypto. A third-party custodian can be useful in making sure you don’t lose access to your funds. Custodial wallets are often a necessity if you wish to trade on the most popular cryptocurrency exchanges, some custodians will offer you a return on your cryptocurrency-based savings.
You don’t have your private key, which means the security is being left to a third party. Someone else is keeping your money for you, which means they can easily decide to take it. Custodial wallets work similarly to the traditional financial system as they are centralized. You may not have access to new cryptocurrencies created through forks of cryptocurrencies you already have.
Pros & Cons of Non-Custodial Wallets
You are in complete control of your bitcoins, which means it is much more difficult to seize your assets. You can transact without anyone looking over your shoulder. You can access advanced features such as non-custodial access to the Lightning Network. You can choose from different levels of protection depending on your threat model. You can achieve a higher level of security through a combination of hardware and paper wallets. You will have full reach to any dividends or staking rewards associated with your cryptocurrency griping.
It will be more difficult to trade your cryptocurrency rapidly, as it will need to be sent to exchange first. Being in charge of your security comes with great responsibility, and human error can lead to theft or accidental deletion. You will ordinarily be presented with user interfaces that are a bit more difficult to learn.
Which wallet type should I use with my crypto?
Both wallet types are good for storing your crypto assets, including NFTs. Most dealers and investors use both in different conditions. However, you should make sure that the wallet you use is just a type of crypto you wish to store. They cannot all be stored in the same way. Sometimes, wallets that continually upgrade to meet the demands of their users may support more tokens over time.
Final Thoughts
Overall, the best non-custodial wallets connect you directly to the blockchain or non-custodial exchange. This allows you to have complete control over your keys, and there is tiny third-party interference. Besides being more secure, non-custodial storage allows you to conduct transactions anonymously and minimizes the risk of third parties. You also have the freedom to buy crypto directly while giving you access to more cryptocurrencies.
