Non-Custodial vs Custodial Wallets: What’s the Difference?
In this article, we dive into what non-custodial and custodial wallets are and how they differ.
By Anna B Kiwanuka
If you currently hold any cryptocurrency, you’ve probably already interacted with a crypto wallet. But a crypto wallet isn’t like a regular wallet in which you’d hold your credit cards and cash, it is a platform that stores the public and private keys for cryptocurrency transactions and funds. There are several different types of crypto wallets to store your crypto funds, but the two main varieties can be broken out as custodial wallets and non-custodial wallets.
In this article, we highlight and explain the difference between non-custodial and custodial wallets.
To start with, custodial wallets are considered a low-entry barrier for those new to the crypto space since they are easy to use and can be accessed from any device with an internet connection. However, security is a major concern.
With custodial wallets, private keys are held by a third party, for example, a crypto exchange or a wallet provider, which means users don’t really control their crypto assets. Instead, users have to trust that the third-party custodian will secure their crypto for them.
While some service providers provide insurance for the cryptocurrencies they keep, custodial wallets have historically resulted in significant Bitcoin losses due to poor management and/or carelessness with regard to protecting users’ assets.
However, with the freedom to be their own bankers also comes the sole responsibility for safeguarding their holdings.
In contrast, non-custodial wallets sometimes referred to as self-custody wallets, are made to offer users complete control over their private key.
One of the most popular types of non-custodial wallets are hardware, or cold wallets, which store private keys offline on a standalone device, often similar in look and feel to a USB drive. Hardware wallets only access the internet when you want to send a cryptocurrency transaction.
Some non-custodial wallets come as software that you install on your computer or mobile device and include the likes of Bitpay, Electrum, Trust Wallet, and MetaMask.
However, the advantages of non-custodial crypto wallets come with a critical condition. Users should have a basic know-how of backing up and restoring wallets. In addition, non-custodial wallets also require users to take responsibility for the security of their cryptocurrency. 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.
In most cases, the private key is generally a 12 to 24-word recovery phrase. Users have to store the recovery phrase in a secure location. For example, you can note down the recovery phrase on a piece of paper and place it in a safe. Users can also type the recovery phrase on a document on their computer and store the hard drive safely in a secure location.
The final verdict on the choice between custodial and non-custodial wallets depends largely on one’s personal preference and needs. Your requirements and plans for your crypto pursuits would play a crucial role in defining the choice of crypto wallet. For example, if you are a beginner in crypto, you can go with custodial wallets for crypto trading.
On the other hand, if you want to store a hefty sum of cryptocurrency securely, non-custodial wallets will be the right pick. Each type of crypto wallet has its own advantages and setbacks, and the comparison between them presents clarity for making decisions. Learn more about both types of wallets and find the best option for you right now.