Non-Custodial vs. Custodial Wallets

Dec 7, 20222 min read
DeFi Guides
Non-Custodial vs. Custodial Wallets

Blockchain wallets are secure, digital storages for your cryptocurrency that come in one of three custodial types – non-custodial, semi-custodial, and custodial. Though each type functions differently, they are all designed to allow you to securely access any digital assets you own.

It’s worth noting that a crypto wallet does not hold any actual cryptocurrency. Instead, it holds the public and private keys needed to carry out crypto transactions. The cryptocurrency itself is stored on a blockchain – a digital ledger that serves as the basis for how cryptocurrencies work.

Public keys work in a similar way to your IBAN number. A public key is simply a string of random numbers that can be shared with third parties, such as a digital asset exchange, without compromising the security of your wallet. This key allows you to receive cryptocurrency – often by using a blockchain address, which is essentially a compressed version of the public key.

Private keys, on the other hand, should be kept confidential at all times. A private key allows you to operate with the actual cryptocurrency on the blockchain. So if someone has your private keys, it’s as good as having access to the digital assets in your crypto wallet.

Non-Custodial Wallets

A non-custodial wallet allows you to have full control over your crypto with no third-party involvement. Non-custodial wallets generally offer more freedom and features than custodial wallets. For example, if you’re interested in exchanging tokens directly on decentralized exchanges, managing NFTs, or liquidity provision, you may want to consider a non-custodial solution.

With a non-custodial wallet, your digital assets can be accessed using a private key that you control. Since you’re the only person managing the private key, it’s important to keep it secure. If you lose or forget your key, you won’t be able to access your digital assets. And if your key becomes known to another person, the contents of your wallet may be in danger.

Custodial Wallets

Custodial wallets are simple to set up, which explains their popularity. These wallets are “hosted” directly on the platform where you buy your digital assets, so they are also known as “exchange wallets.” If you’ve ever bought cryptocurrencies on an exchange and kept that crypto on it, you’ve already used a custodial wallet.

With a custodial wallet, the crypto exchange typically stores your private key for you. This personal information is kept and accessed online, which makes it potentially vulnerable to hackers. Custodial wallets may also be limited in their use cases, and you may not be able to execute certain transactions – such as buying an NFT. On the plus side, forgetting your login credentials is not a problem because the exchange has ways to help you retrieve that data.

Semi-Custodial Wallets

These are types of wallets where the crypto exchange holds half of the private keys while the other half is with the end user. This creates a shared responsibility of storing your keys between both parties and provides an extra layer of security. The advantage here is that if a user loses access, the exchange can assist in the recovery of the key.

Choosing the right wallet is an important decision when it comes to securing your funds. Still, there is no right way or wrong way. As you are free to decide whether to trust an institution or to take the responsibility to hold your own private keys, we advise you to do your own research before taking any action.

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