Crypto wallet

Custodial Wallet vs. Non-Custodial Wallet: What are they?

  • 2021-10-14

When dealing with cryptocurrencies, the need for a crypto wallet is indispensable – to access, store, and transfer crypto assets. Crypto wallets are broadly categorized into two types, i.e., custodial wallets and non-custodial wallets. More often than not, the majority of individuals are on the fence about choosing between the two. However, detailed insights into custodial and non-custodial wallets can help you make the right choice.

What is a custodial wallet?

A custodial wallet is a digital wallet, wherein the private key of the wallet is held by a third party (or a custodian). It means that the third party has complete control over your crypto assets, while you are only charged with permitting to send or receive funds.

Pros of a custodial wallet

  • Cost-efficient transactions

Unlike other wallets, the custodial wallet eliminates the need to pay a transaction fee. You can execute transactions at no cost within the ecosystem.

  • No issue of the lost private key

Given that a third party manages your private key for you, even a frightening incident like losing your key is not an issue. The third party has solutions to help you regain access to your wallet.

  • Easy backup

In an event when you lose access to your wallet – maybe because the device on which your wallet was installed broke down – the third party has backup solutions to help you access your wallet.

Cons of a custodial wallet

  • No control over funds

With a custodial wallet, you are not in control of your funds. The third party manages your funds and processes related to it.

  • Risk of hack

Although non-custodial wallets are not easy to hack, they are pregnable to a security breach. A recent example of it is the Liquid Global attack, wherein the security of the digital wallet was compromised, which led to the heist of digital coins worth 97 million.

What is a non-custodial wallet?

A non-custodial wallet lets you handle your private keys, thus your funds. Since you have complete control over your transactions, you can be your own bank and execute transactions without the involvement of a third party.

Pros of a non-custodial wallet

  • Complete control over assets

The biggest benefit of a non-custodial wallet is that you have complete ownership of your cryptocurrencies. You need not count on any third party for the management of your funds.

  • Instant transactions

Since you do not need to rely on a third party to execute transactions, you can ensure accelerated transactions – be it the withdrawal of funds or sending crypto assets to someone.

  • Lower risk of a security breach

Given that you are in complete control of your assets, the risk of a security breach is relatively low. Your funds are out of harm’s way.

Cons of a non-custodial wallet

  • No assistance

The elimination of third-party involvement means that you have to handle everything on your own, including your mistakes. Even a small typo can lead to a loss, and there is no one to help you fix your mistake.

  • If you lose your key, you lose your funds

If you lose your seed phrase and password, there is no one to guide or help you to restore your wallet. You are on your own, so you need to be vigilant.

What is the difference between custodial and non-custodial wallet?

  • Custody of private key

A major difference between a custodial wallet and a non-custodial wallet is the custody of the private key. In the custodial wallet, the third party manages the key; whereas, in the non-custodial wallet, you hold your key.

If you want to manage your funds on your own, the non-custodial wallet is an ideal option for you. On the contrary, if you want a third party to manage your funds for you, the custodial wallet is your option.

  • Type of transaction

A transaction happens in real-time in the case of a non-custodial wallet. It does not happen in the case of a custodial wallet due to the involvement of a third party.

If you want to leverage accelerated transactions, the non-custodial wallet is the right choice.

  • Security

Custodial crypto wallets store user data in hot and cold storage, which are vulnerable to hacking. This type of wallet is low on security unless the third party harnesses strong security measures to keep data intruders at bay. On the contrary, a non-custodial wallet enables you, the user, to store and manage your information. This mitigates the risk of data theft unless you compromise on your data security and share your information with someone.

  • Backup and recovery

In the case of backup and recovery, custodial wallets are better than non-custodial wallets. In the former, the third party is responsible to recover your wallet in case you lose access to your wallet due to any reason. This cannot be achieved in a non-custodial wallet. Since you are the only authority managing and controlling your wallet and its private key, you will have to do everything on your own; the third party cannot help you in the recovery process.

If you are not confident about managing your funds, especially if you are a beginner, it is wise to opt for the custodial wallet.

Wrapping up

Custodial and non-custodial wallets have their share of advantages and disadvantages. When it comes to choosing between the two, consider your requirements and weigh the pros and cons of both to solidify your decision. Regardless of your choice, focus on security to ensure the safety of your funds.

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