Non-Custodial Vs Custodial Wallet: What’s the Difference?

Non-Custodial Vs Custodial Wallet: What’s the Difference?


This Learn article will look at what are crypto wallets and what is the difference between non-custodial and custodial wallets.

magnificent Result of FTX crypto exchange sent shock waves across the industry. It also highlighted several important questions, including the nature of speculative investing.

just before filing bankruptcyftx suspended clearance of user funds, citing liquidity issues—and leaving an army of angry customers without access to their hard-earned coins.

The truth is that this can happen with practically any other centralized crypto exchange, if it finds itself in a liquidity crunch like FTX, as most of them use so called non-custodial wallets, which means That it is the exchange that holds the clients’ funds. , not the customer himself.

This Learn article will look at what are crypto wallets, and what is the difference between non-custodial and custodial wallets.

What is a crypto wallet?

a crypto wallet A piece of software or hardware that enables you to store, access and interact with cryptocurrencies such as Bitcoin And Ethereum,

Whereas a hardware wallet is a standalone physical device used to store digital assets, software wallets are installed on a user’s device (desktop or mobile). Both hardware and software wallets store private keys—strings of letters and numbers, which actually act like highly sensitive passwords.

Access to the private key gives an individual the ability to send crypto assets from a particular public address, making private key management extremely important.

Custodial Wallet Vs Non-Custodial Wallet

Custodial wallets are considered a low-entry barrier for newcomers to the crypto space as they are easy to use and can be accessed from any device with an internet connection. However, security is a major concern.

With a custodial wallet, the private key is held by a third party, such as a crypto exchange or wallet provider, meaning users do not actually control their crypto assets. Instead, users must trust that third-party custodians will secure their crypto for them.

While some providers offer insurance for cryptocurrency, custodial wallets have caused large bitcoin losses in the past due to mismanagement and/or carelessness regarding securing users’ funds.

In contrast, non-custodial wallets (also known as self-custodial wallets) are designed to give users complete control over their private keys; However, with the freedom to be one’s own banker comes the full responsibility of protecting their holdings.

One of the most popular types of non-custodial wallets are hardware, or “cold” wallets, which store private keys offline on a standalone device, often in look and feel similar to a USB drive. Hardware wallets only use the Internet when you want to send cryptocurrency transactions.

Some non-custodial wallets come as software that you install on your computer or mobile device and include BitPay, Electrum, Trust Wallet, and MetaMask.

What are crypto wallets used for?

once you have a purse installed on a device, you can buy, sell and store bitcoin or other supported cryptocurrencies; or any other transaction, such as payment for goods and services; Or get paid for your work.

Some wallets have a built-in option that allows you to buy and sell crypto through integrated crypto exchanges via a dedicated tab, while others require you to deposit funds on the trading platform first.

Generally, if you want to send money, or provide your own address to receive transactions, you only need to know the recipient’s address. Many wallets simplify this process with the help of QR codes, which allow you to send or receive crypto assets in a fast and secure manner.

more privacy

A key difference between a user’s crypto wallet and bank account in the traditional banking system is that the traditional bank account number is directly linked to an individual’s identity, allowing financial institutions and government agencies to track transactions.

When you interact with cryptocurrencies like bitcoin, transactions are pseudonymous, i.e. they can be viewed on a public blockchain. But there is no direct way to associate an address with a particular person.

In other words, the wallet interface enables users to interact with their digital assets in such a way that they can send peer-to-peer transfers over the network without the need for trusted intermediaries or compromising on their privacy.

security aspect

There are pros and cons to holding your crypto assets in different types of wallets, so it is up to you to decide on the right mix of convenience and security for your funds.

In theory, self-custodial crypto wallets are mostly secure: it is not possible to steal coins with just a public address, nor can network transactions be compromised by a third party. Furthermore, as we saw in the FTX case, non-custodial wallets can be an obvious choice for anyone looking to be financially sovereign.

Even so, your funds are only as secure as the private keys required to access and send coins. When you interact with crypto, there is no central authority to appeal if you lose your funds, so it is gone forever.

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