Custodial vs non custodial wallets - Everything you need to know


The growing interest in cryptocurrencies has led to a boom in the number of digital asset wallet apps available on mobile and desktop. These wallets store the investor’s digital currency and allow them to receive payments and transfer funds from one wallet address to another. The majority of cryptocurrency holders are likely to be custodial investors who need to hold their coins offline and securely until they wish to sell them, trade them or spend them. On the other end of the spectrum, many casual users are likely only to hold small amounts of cryptocurrency that they may not need to spend for some time.In this article we will discuss in detail about Custodial vs non custodial wallets, advantage and disadvantages of each, and our recommendation. Read on:

What is a Custodial Wallet?

The platform or firm that provides custodial wallet services has total access to the accounts. They can control these accounts using their private keys. These private keys are kept by the firm and are never shared with the clients. then creates the wallets, and often controls the private keys themselves rather than sharing the private keys with the user.

How does a custodial wallet operate?

One can guess by the name that this type of crypto wallet entails preserving custody of the client’s crypto assets. A cryptocurrency investor opens an account with one of the custodial services. Private keys are required to access cryptocurrency. Those keys are in the hands of the firm that delivers the services of custodial wallets. This suggests that investors do not have total control over their crypto holdings as a consumer.

Purchasing the cryptocurrency through a centralized exchange (CEXs) means the clients are using the custodial wallets. These exchanges keep their possessions on a private network and handle balances on a native ledger. A large fraction of the user’s money is kept in cold wallets which means the assets stored in the wallets are not linked to the internet. This makes the money stored in these wallets generally inaccessible. They are protected by multiple signatures and passwords to avoid thefts or cyber-attacks. Some of the crypto holdings of a client are kept in hot wallets, which are linked to the internet. As a result, this portion of the money is more customer-friendly, allowing the client to do transactions more readily.

Advantages of a Custodial Wallet

Clients benefit from using custodial wallets in a variety of ways. Let's go through them quickly: Custodial wallets offer user-friendly interfaces designed with the user's convenience in mind. This implies they are simple to handle and require minimal responsibility. If cryptocurrency investor keeps their funds in custodial wallets, they may be quickly traded. The custodial wallets come with easy recovery options. If an investor forgets their login credentials, they can still access their accounts by supplying extra information, as with any password reset process. A significant benefit that the user can get from using the custodial wallets is that they may simply add cash equivalent to investors' wallets from the associated bank account. Custodial wallets enable users to purchase and trade a wide range of cryptocurrencies. This means that a huge number of individuals can use these wallets without regard to the type of cryptocurrency they can save in them. When a user conducts a transaction using the blockchains, they will have to pay a processing fee. High-paying users' transactions will be processed more quickly. Some custodial wallets, on the other hand, enable their clients to conduct transactions for free inside their system. This is possible mainly because of side chain technology.

Disadvantages of a Custodial Wallet

Now let’s take a look at some of the disadvantages of using custodial wallets:

Because they have access to the client's private keys, a third party has power over their crypto assets. The clients’ do not even know their keys. This means they are entrusting a service provider with all of their funds in the wallet, which the firm can freeze if it believes the clients’ activities violate the terms and conditions of using the wallets. Security concerns are one of the major reasons that discourage people from using custodial wallets. Typically, service providers keep all wallets and customer information on a single server. As a result, hackers may easily perpetrate cyber theft. Before using custodial wallets, one must first research a trustworthy exchange with strong security measures. Custodial wallets need the user to create an account by giving the exchange with necessary KYC and AML information. This implies that the service provider will have information about the customers, such as their ID card, passport information, and bank account information. That makes using custodial wallets increasingly riskier. It implies that users' transactions and activity are being tracked, and accounts can be frozen at any moment. This procedure is also time demanding. Finally, a person cannot access their wallets unless they are linked to the internet. If the customers do not have a good internet connection and want to access their wallets, they can not.

Example of Custodial wallet: Cryptocurrency exchanges and Mobile wallets

Some of the examples of Custodial Wallets include: StashWave - We enable cross-border payments through the Bitcoin lightning network with easy access to liquidity. The beneficiary can instantly convert the Bitcoin to USD and withdraw to the back using the current market rate WazirX: The WazirX originates in the Indian city of Mumbai. It is a custodial wallet with a daily trade volume of more than $104 million. Binance, the world's largest cryptocurrency exchange, purchased it. WazirX P2P is the world's first auto-matching P2P engine that tries to bridge gaps between the world's present paper currency and cryptocurrency. Coinbase: This custodial wallet for keeping cryptocurrency assets will assist the customers in carrying out transactions using prominent currencies such as Bitcoin and Ethereum. The platform supports over 120 different types of coins. So, this wallet serves a wider number of consumers. Paxful: This custodial wallet has its own app where consumers can effortlessly purchase, sell, and store cryptocurrency. This wallet is one of the world's largest peer-to-peer cryptocurrency markets. Binance: Like the other examples mentioned above, this is a cryptocurrency exchange that has grown in popularity over time. The rapid speed, low transaction processing costs, and massive volume of transactions contributed to its popularity. A large number of individuals use a platform. Localbitcoins: One of the earliest regulated peer-to-peer (P2P) online markets for buying and selling Bitcoins is LocalBitcoins (BTC). Furthermore, LocalBitcoins provides the most payment options. CoinDCX: It is one of the top 50 crypto exchanges in the world, according to Coinmarketcap. This wallet accepts around 40 cryptocurrencies, ranging from well-known coins such as BTC and ETH. Bitbns: These wallets began functioning in 2017. It is an Indian cryptocurrency exchange with the name 'Bitcoin buy and sells.' As the name implies, it was first designed to handle only Bitcoins, but it now supports over 50 cryptocurrencies.

What is a Non-Custodial Wallet?

This type of wallet is diametrically opposed to custodial wallets. The service providers in this case do not have access to the account's private keys. Clients, on the other hand, have complete access to them. Simply explained, it is a form of decentralized wallet. The user is given a file with the private keys, and they will have to write down a memorable phrase that will allow them to regain their cash. Users will have full control over their finances. As a result, they will solely be held accountable for the loss of their money.

How do Non-custodial wallets operate?

Unlike custodial wallets, the private keys and passwords of a non-custodial wallet are only in the possession of the wallet user. This means that the crypto investor is also the account manager. They are both investors and service providers. This wallet complies with all the principles of cryptocurrency. Moreover, it allows crypto investors to communicate with DeFi applications on the blockchain. The non-custodial wallets are mainly for those who are experienced in cryptocurrency trading and understand its technology. A seed phrase, or a unique phrase made up of 12-24 random words, will help the user retrieve custodial wallets. The user must keep this seed phrase safe. If the user's hard disc fails, the wallet may be reloaded with this seed phrase. If this seed phrase is lost, the user will lose all of their funds.

Advantages of a Non-Custodial Wallet

The security of the funds in non-custodial wallets is their plus point. The non-custodial wallets provide the users total control over their money. The private keys are in the possession of the wallet's owner. Customers will enjoy using this wallet if they are tech-savvy, understand how non-custodial wallets operate and can secure their seed phrase. Non-custodial wallets are theoretically the most secure. Non-custodial wallets are widely used in the decentralized finance (DeFi) ecosystem since they are required for engaging with decentralized apps (dApps). This means that non-custodial wallets can interact with the vast majority of decentralized apps (dApps) and permissionless financial protocols. Transactions using non-custodial hardware wallets are done offline, thus no internet connection is required to access your account. As a result, the user does not need to be concerned about online theft. Non-custodial wallets, in contrast to custodial wallets, never request KYC or AML information from their consumers. As a result, a client does not have to go through the time-consuming and rigorous processes to access their savings in their wallets. The user has the option of remaining anonymous. If a cryptocurrency investor has a non-custodial wallet, he can make trades at any time. Non-custodial wallet transactions are quicker since there is no middleman or centralized authority to authorize the transaction. The majority of blockchains allow users to conduct transactions in a matter of seconds.

Disadvantages of a Non-Custodial Wallet

Despite the fact that non-custodial wallets are recognized for their security, they can be hacked if the computer is infected with a virus or spyware. As a result, the security of the client's wallet may be jeopardized. A user must verify that his computer has proper anti-virus software installed on their PC. Using non-custodial wallets is highly difficult, but if a person can easily set them up, they are ready to go. Complete control over keys might be advantageous, but if a client forgets their seed phrase, all of their investments and funds are lost. This means that there is no hope of recovery in this circumstance. To avoid this problem, one must keep their seed phrase safe.

Example of Non-Custodial wallet - Trezor and Ledger Nano S - The best cryptocurrency hardware wallets

Types of non-custodial wallets

Non-custodial wallets are classified into numerous types. Let's have a look at them: Hardware wallets are frequently referred to as cold wallets. For security reasons, these wallets keep the keys protected offline. In terms of appearance, these wallets resemble small external discs. When a user wishes to access their funds, they must connect these wallet devices to their computer and perform the transaction manually. If a user has a substantial number of crypto assets, they must choose this form of wallet since they do not monitor the user's activity. Trezor and Ledger are two popular non-custodial hardware wallets. Non-custodial software wallets are also referred to as hot wallets. These are similar to any other software that people may install on their Desktop computers or mobile devices. Private keys for these wallets are accessible online. AtomicDEX and Metamask are two examples of non-custodial software wallets. To use the Web-based Wallets, you must have an internet connection. A private key login is also required. MetaMask and TrustWallet are examples. Mobile wallets can allow a client to complete his crypto transactions by scanning a QR code. They may be accessed via fingerprint or face recognition technology. The Exodus mobile wallet is one example.

Examples of non-custodial wallets

Some notable examples of non-custodial wallets include:

  • Magic
  • Coinbase Wallet
  • Trust Wallet
  • MyEtherWallet
  • Coinomi
  • Zengo
  • BRD


Custodial wallets are designed for cryptocurrency newcomers. If a consumer does not know how to manage their money, they must use these wallets. However, handing your private keys to a third party increases the danger of security breaches. Non-custodial wallets, on the contrary, offer better security and flexibility, but a client must also know specific technical details.

Custodial wallets may be advantageous, however, customers with greater assets prefer non-custodial wallets since they do not want their activities tracked. Furthermore, they wish to increase the security of their assets.

All of the information presented above should be adequate for you to make your decision. You may also conduct additional research to double-check all of this information. To summarize, each wallet has various benefits and disadvantages; you should only select the one that best meets your needs.

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