Which is Safer? Custodial or Non-Custodial Wallets?
If you have bought or received a crypto asset, you already have a wallet. So, I presume you are eager to know which one you have, a custodial or non-custodial wallet? Also, you definitely want to know which is safer.
The adoption and use of cryptocurrencies have grown exponentially. In fact, nearly every millennial and Gen Z has bought a crypto asset or received one from an airdrop.
On the other hand, if you have never bought a crypto asset, but you have heard industry experts in finance and technology speak highly of it, you now wish to purchase a coin but are faced with the dilemma of selecting a wallet type!
There is a lot of cluttered information available online that could leave you overwhelmed! Don’t be! We have broken this down in easy to understand steps for you to quickly understand the pros and cons.
What is a Wallet?
A cryptocurrency wallet is a software or hardware that uses blockchain technology to safely administer, transmit and manage cryptocurrencies. Unlike your typical purse or wallet, where you keep your fiat money (money issued by a central bank in physical bills), cryptocurrency wallets only hold digital assets — crypto assets and Non Fungible Tokens (NFTs).
Now that you understand what a wallet is, we’ll discuss two of the most popular cryptocurrency wallets: custodial and non-custodial. Next, you’ll see why choosing one over the other is critical.
What is a Custodial Wallet?
As its name implies, a custodial wallet is a third-party application that manages your cryptocurrency private keys for you. Hence, you needn’t remember your seed phrases; a third party does that for you. This third-party (usually a centralized exchange) maintains all your crypto assets in custody. In addition to your keys and seeds, custodial wallets keep other information records, like your name and KYC document.
A custodial wallet is similar to the traditional banking system, where you deposit your funds and trust their safety in the hands of your financial institution.
The most significant benefit of custodial wallets is the ease of usage. They don’t require sophisticated technical knowledge of cryptocurrency; as a complete novice, you only need to provide your email and password to create an account and log in to the custodial wallet. You can reset your account password if you forget it.
Additionally, these platforms will present you with some recommended security steps (like a 2-Factor Authentication) to safeguard your assets. The coolest part is that you can’t technically lose access to your wallet; you can’t lose them because you don’t have the private keys.
Advantages of Custodial Wallets
While a custodial wallet gives users less control over their assets, many prefer it because it requires less responsibility and is usually more convenient. Here are other advantages of the custodial wallet.
· You cannot lose your private keys: You are not in control of your keys when using a custodial wallet. Hence, safeguarding the private key or mnemonic is the responsibility of the third-party platform. As a result, you can’t lose your keys since all you have to do is log in to your account.
· Easy access to fiat currency: Since most custodial wallets are managed by a Centralized exchange (CEXs), it is easy and extremely cheap to trade crypto assets for fiat currency and get money in your bank account.
· Backup option: Another significant benefit of using custodial wallets is that it allows you to keep your money safe. The wallets used here are frequently administered by a central authority that assists or offers a helpful service to the possibility of wallet backup. This comes in handy when you need to pause or cancel a transaction and when you need to restore from a prior version.
Disadvantages of A Custodial wallet
· Requirement of KYC: If you aren’t skeptical about putting your information online, you may not consider this a drawback. Due to governments’ Anti-Money Laundering policies (AML), CEXs require KYC verification to access your account.
· Your fund is at the hands of a third party: Since a third party is in charge of your account, they have complete authority over your funds and can freeze them if they so like.
What is a Non-custodial Wallet?
Non-custodial wallets allow you to completely control your funds and the private key. As a result, you function as your bank and conduct transactions without the intervention of a third party. Since the non-custodial wallet is not under anyone’s control, you are entirely responsible for keeping your keys safe and accessible. You make your own rules and manage your money the way you want. Non-custodial wallets are often referred to as decentralized wallets.
When creating a non-custodial wallet, keep a few things in mind. A mnemonic will be given to you containing 12 to 24 random characters and words. The wallet will be restored using this key. As a result, if you use this wallet, you should write down the mnemonic key and keep it safe against illegal access. You can use the recovery phrase to get back into your wallet if you’ve lost access.
Remember that anyone who knows your seed phrase can access your crypto wallet; please don’t give it to anyone or keep it on the internet.
You can select from a variety of non-custodial wallets. For example, Browser-based wallets, hardware devices, and software can all be installed on your phone or computer. If you choose a physical wallet, ensure it is not lost or damaged, as you will be unable to reclaim your assets if this occurs.
Advantages of Non-custodial Wallets
· You have complete control of your assets anytime, anywhere, without interruption.
· To access or move your funds, you do not need to give up any personal information.
· The permission of a third party is not required to transfer, store, and trade assets.
Disadvantages of Non-custodial Wallets
· Since your cryptocurrency must first be transferred to an exchange, trading it will be more challenging and expensive.
· You will almost always be presented with increasingly difficult-to-understand user interfaces.
· Being in control of your security entails a significant responsibility, and you may be easily susceptible to hacks.
· Any error on your part could expose you to theft or cause you to accidentally lose your assets.
Which is Safer? Custodial or Non-Custodial?
In the end, the safer type of wallet is relative.
For experienced crypto users who do not want anyone to control their funds, a non-custodial wallet is ideal. Since it is a decentralized wallet, all users have authority, and each person holds their funds.
On the other hand, if you are new to cryptocurrency and don’t want to be solely responsible for your account’s security, or if you prioritize cheap transactions and backup options, then a custodial wallet is something you should consider.
Regardless of whatever wallet option you go for, make sure to follow the best security standards.
The Best Custodial Crypto Wallet
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