What is safer? Custodial and Non-Custodial Wallets

What are Custodial and Non-Custodial Wallets?

The main difference between them is the control over the private keys. A third party holds the private keys in a custodial wallet, while you will have complete control and hold your private keys in a non-custodial wallet. If we need to simply explain it, non-custodial wallets are vaults in your house, and custodial wallets are vaults in a bank. Of course, when you keep your crypto assets in a third party’s custody, you accept their terms and conditions.

Non-custodial wallets are completely in your control. You have full responsibility for your assets in the wallet. At first glance, custodial wallets may sound safer, but it is not simple. Before choosing a custodial wallet, make sure a regulated finance company insures your assets and provides legal security.

Benefits of using a Non-Custodial Wallet

'Not your keys, not your coins' is a famous expression in the crypto world. When you use a non-custodial wallet, you will have complete control and responsibility for your funds. Unless your private keys are lost or stolen, you don’t need to worry about your crypto assets.

Non-custodial wallets can be anonymous and don’t require KYC (Know your customer). You can use non-custodial wallets without exposing your identity. You can use a non-custodial software wallet or a cold wallet. Cold wallets are more secure compared to software wallets. You can visit the wallets page and compare different crypto hardware wallet manufacturer and their products.

Benefits of using a Custodial wallet

Custodial wallets are convenient and provide peace of mind for crypto holders. Leading crypto saving, lending, and exchange platforms have a proven history. The critical point of using a custodial wallet is choosing a reliable company. Major companies like Binance, Coinbase, Nexo, Coinloan, BlockFi, Celsius, and AAVE are leading platforms, and they provide insurance and custody with regulated financial institutions. You can visit the savings account page and learn more about different platforms and their services.

Custodial wallets are also way more convenient to use. Transactions cost less, and speed is faster. You don’t have to worry about your private keys. You can always contact customer support and get help.

Risks of using a non-custodial Wallet

Non-custodial wallets are not the easiest to use and there won’t be customer support when you need it. Transactions are slower because all transactions are completed on a blockchain in real-time. If you are new to crypto, starting with a non-custodial wallet can be confusing.

Since communities mostly develop non-custodial wallets, they don’t have the best user interface. You will have complete responsibility for your funds. Losing private keys means you lose your funds.

Risks of using a custodial Wallet

The major downside is trusting your funds to a third party because most crypto financial services are not regulated and carry the risk of bankruptcy. There are many examples worldwise; Quadriga exchange services is a famous one from Canada, which later became the subject of a Netflix original documentary after leaving conspiracy theories behind. Thodex from Turkey and Africrypt from Africa are other failures in crypto history.

Another drawback of custodial wallets is KYC requirements. Most exchanges are obligated to obtain personal identity information from customers in order to be aligned with traditional banks.

What are Private and Public keys?

Public keys are like routing numbers and account numbers in USA and IBAN in Europe. It is your unique address to receive funds from a third party. Sharing your public keys doesn’t carry any risk.

Private keys are the keys to your vault. Don’t share it with anyone. Anyone with access to a wallet’s private keys can have control over the funds. When you use a non-custodial wallet, make sure you secure your private keys in a safe place.