Custodial Vs Non-Custodial Wallets: Differences Explained

By Fotis Dixon


Reviewed by: Fotis Dixon

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Custodial Vs Non-Custodial Wallets

If you possess cryptocurrency, deciding the right wallet to store and protect your digital assets is important. It can be a tedious task to decide which wallet to buy because there are so many varieties available in the market

The custodial vs. non-custodial nature of cryptocurrency wallets is one of their primary distinctions.

Here in this article let’s dive deeper into their distinctive features and differences.

What is a Cryptocurrency Wallet?

A cryptocurrency wallet is used to store private and public keys and communicates with different blockchain networks so that users can transmit, receive, and manage their Crypto holdings.

Custodial Wallet

It’s important to understand how cryptocurrency wallets work before going into the details of custodial wallets.

Users’ funds are not physically stored in crypto wallets. Instead, they have a private key, which is used to authorize transactions, and a public key, which helps the user to set up transactions.

A custodial wallet, as the name suggests, is where users’ private keys are kept safe and secure by a third party.

The third party is in complete control of the user’s cryptocurrency assets and is in charge of keeping track of their wallet key, verifying transactions, and safeguarding them.

Custodial wallets are offered as mobile or web apps by custodial wallet providers or cryptocurrency exchanges.

Investors, use the wallet provider’s interface to manage their money and complete transactions after logging into their wallet account.

This suggests that in order to prevent unauthorized access, users must have belief in the service provider to safely keep their tokens and put robust security measures in place. These consist of email verification, biometric authentication (fingerprint or face recognition), and two-factor authentication.

Custodial Vs Non-Custodial Wallets

Non-Custodial Wallet

On the other hand, in a non-custodial wallet, also known as a self-custody wallet, the owner of the cryptocurrency is in sole charge of handling their assets.

The user manages their own private key, conducts transactions, and has total control over their cryptocurrency holdings.

Custodial Wallets can take different forms. The browser extension that enables users to enter their private key and start transactions is a browser-based wallet. Apps that may be downloaded for mobile devices serve as mobile wallets.

On the other hand, hardware wallets are real objects. Many people believe that hardware wallets are the most secure solution because they can be accessed and managed offline.

A seed phrase is given to users of non-custodial wallets. The “recovery” or “seed” phrase is a set of 12 randomly created words that users are required to write down and save after making their wallet. One can generate the public and private keys from this phrase.

In the event that users misplace their original device, it also serves as a backup or recovery method. Complete power over the money in a user’s wallet will be available to anyone who knows the seed phrase. The user will not be able to access their money if the seed phrase is lost. 

To send money and make other transactions, users require their private keys. The transaction can be signed offline and uploaded to the blockchain for further confirmation, or it can be reflected in real-time on-chain based on the non-custodial wallet being used.

The Bottom Line

Custodial and Non-Custodial wallets specifically have their own pros and cons. Custodial wallets are a reasonable option for those who value backup recovery options and convenience of usage.

But non-custodial wallets can be what people desire if they want complete ownership and control over their private keys. At the end of the day, the user has the final say.

Cryptocurrency assets are subject to see fluctuations in value, and you might lose all or a significant portion of your initial investment if you are not careful.

You must ensure due diligence and research while evaluating a crypto asset in order to make the best decision possible, as any purchases will be your complete responsibility.

Fotis Dixon

Fotis Dixon is a business expert from the UK. He's written lots of articles about the newest market research and trends, especially on cryptocurrencies. Fotis is good at breaking down different topics to give useful information, helping readers stay updated on emerging trends.

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