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Novice guideCustodial vs Non-custodial Wallet - What's a Non-custodial Wallet?
Custodial vs Non-custodial Wallet - What's a Non-custodial Wallet?
2022/11/07 16:03:35


Introduction

Crypto wallets come in many different forms, but can broadly be classified as either custodial or non-custodial. If you own any cryptocurrency, you've likely already used a crypto wallet. But unlike a regular wallet, which might hold your cash and credit cards, a crypto wallet doesn't actually store your cryptocurrency. Rather, it provides access to your funds on the blockchain and allows you to initiate crypto transactions.


What is a Custodial Wallet?

Custodial wallets are usually web-based and provided by centralized crypto exchanges. Most exchanges’ interfaces are designed so users never have to directly interact with their wallets. This user-friendliness means custodial wallets are generally preferred by casual cryptocurrency users, who appreciate the convenience of not having to manage their private key themselves.


Wallet holders who use custodial wallets can rest assured that a forgotten or lost password does not mean they will lose access to their funds. In most cases, providers or exchanges can reset your password with a few security questions. If a non-custodial wallet holder loses their private key, their funds may be unrecoverable.



Wikipedia


With a custodial wallet, a user simply logs in to the web platform of their wallet provider and can initiate a transaction to any other wallet. The custodial wallet provider maintains a number of safeguards and checks that ensure to the maximum extent that no mistakes are made and no funds are lost.


Receiving coins to a custodial wallet is just as simple. The user logs in to the wallet provider, selects the coin type, and then is provided with a deposit address. After a certain number of blockchain confirmations, the deposited funds will be available in your wallet.


Notable custodial services

There are many custodial wallet providers to choose from. Most of these are either exchanges or CeFi platforms. Exchanges allow you to buy and sell cryptocurrencies. CeFi platforms, or “Centralized Finance” platforms let you stake your cryptocurrency holdings and provide you with interest for your holdings. CeFi platforms also provide services such as crypto backed credit cards, loans and other investment opportunities.

blog.vaulthill.io


One of the notable custodial wallet services you might like to try is the CeFi platform NEXO. This platform lets you earn interest on 40 different cryptocurrencies. They also provide loans backed by your crypto holdings and a crypto backed debit card. There’s also the NEXO token which gives you the ability to earn higher interest rates while holding the token you can sign up at nexo.io.


Another notable custodial wallet provider is FAMEEX. Our exchange provides more than 70 popular cryptocurrencies to trade with spot, margin and options trading. There’s also AI bot strategies which let you earn money from your holdings in a risk free way. The wallet is capable of holding a wide range of cryptocurrencies and there are multiple layers of security to keep your coins safe such as 2-factor authentication, whitelisted addresses and secret phrases. There is also a convenient mobile app so you can access your crypto wallet from anywhere. Signing up for a FAMEEX account is easy and free, all you need is an email address!


What is a Non-custodial Wallet?

A non-custodial wallet means that the wallet gives the user complete control over their private keys. This means the responsibility for security lies with you. This level of responsibility is not for everyone and is more suited to experienced crypto users.


The saying, “Not your keys, not your coins” means whoever holds the private key to the coins is the only true controller of those funds. Some cryptocurrency true believers take this to mean that custodial wallet users don’t actually “own” their coins.


ledger.io


Non-custodial wallets store the crypto private keys on your device and allow you to sign transactions to the blockchain. A non-custodial wallet usually is specifically designed for one type of cryptocurrency, so if you need to store several different cryptocurrency types you will need to have a non-custodial wallet for each one.


There are a few different types of non-custodial wallets, but the most secure is a hardware wallet. Hardware wallets look like USB thumb drives, and they're only online when they're connected to a computer or mobile device. The private key is used to sign transactions within the device, and then the transaction is sent to the blockchain to be confirmed. This makes hardware wallets that are non-custodial virtually impervious to hackers.


Notable non-custodial wallet providers

If you need to store Bitcoin, Electrum wallet is a good choice. It’s an advanced wallet that allows you to import and export your private key easily. If you want to store Ethereum, a popular choice is Metamask wallet. This wallet is a browser extension and mobile app that lets you interact with web3 enabled apps on the internet. Another type of wallet is a hardware wallet for example the Ledger hardware wallet. Although quite expensive, this wallet is very secure and can hold multiple cryptocurrencies.


What are the Main Differences Between Custodial and Non-custodial Wallets?

A custodial wallet takes care of security and private keys and provides a portal through which you can access your coins, whereas a non-custodial wallet leaves security and private keys up to the user and provides an interface to create blockchain transactions.


Non-custodial wallets are more suited to crypto users who know what they are doing and allow more advanced types of blockchain interactions such as connecting to dApps and DEXes. Custodial wallets give peace of mind in that all the security is taken care of, yet still provide access to a wide range of financial tools such as trading and staking.


What are the benefits of custodial wallets?

• No chance of losing your private keys.

The custodial wallet provider handles everything, you just need to log in.


• Capable of holding a wide range of cryptocurrencies on different networks.

One account can hold every type of cryptocurrency. Deposit and withdrawal addresses are handled by the wallet provider.


• High security with 2FA and whitelisting addresses.

Custodial wallets put safeguards in place so no one can just access your account with your password.


• Can access your coins on any device just by logging in.

Your wallet is available online anywhere, your coins are not tied to a single device.

 

• Regulatory compliance.

Exchanges are increasingly requiring funds to come from custodial wallets.


What are the benefits and limitations of non-custodial wallets?

• Relative anonymity.

Anyone can install and use a non-custodial wallet just like a piece of software.


• Complete control over your cryptocurrency.

Private keys are under your control. Everything is the user's responsibility.


• Usually only stores one type of cryptocurrency.

Each coin will have its own individual wallet software. Storing 20 different coins on non-custodial wallets could get very complicated.


• Security is up to the user, they need to take care of their private key.

Store your seed phrase and private key in a safe place. Don’t accidentally download a fake wallet. Don’t accidentally download a virus which steals your private key.


• Hardware wallets cost money.

A ledger wallet costs over $100 dollars. Other hardware wallets are in the same price range.


• Regulatory uncertainty.

The funds in a non-custodial wallet could become tainted by the proceeds of crime. Which could result in your coins being frozen or seized by the authorities.


Which Should You Choose? Custodial or Non-custodial Wallet?

The answer to this question depends on how you want to use cryptocurrency. If you want to just hold your coins and not touch them for decades, you should probably learn how to use a non-custodial hardware wallet and learn how to keep your own private keys safe. If you want to access your coins at any time and from anywhere, signing up for a FAMEEX account and getting a secure custodial wallet will serve you better.


This is not investment advice. Please conduct your own research when investing in any project.


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