Custodial vs. Non-Custodial wallets: Difference Disclosed

• Avinandan Banerjee
• November 03, 2023

Can you remember how many times you tried the forgot password button last year?Maybe multiple times. In fact, most people forget their passwords in just two weeks.

This is where password managers like Google password come in. It saves all our passwords in secure encrypted storage, and only the individual with the device can access it.

Just imagine your life without the forgot password button and without password managers. Then we all would have to remember the passwords of the plethora of multiple accounts we use. It sounds like quite the hassle, doesn’t it?

Similarly, with all the rage of cryptocurrency and NFT’s, we are seeing numerous first-time investors joining to get a piece of the pie. With it comes the need to store the key to your crypto and NFT wallet. We are left in splits whether to choose a custodial wallet or use a non-custodial wallet.

In this article, you will know everything about Custodial and Non-custodial wallets and which one shall be the best for you. Let us dive in.

Custodial Wallet

If you have already invested in cryptocurrency, then there is a high chance that you are using a custodial wallet. As the name suggests, a custodial wallet or a hosted wallet is a third-party application that saves your information, funds, and the key to your NFT wallet.

Advantages of custodial wallet

Negates the risk of financial loss: Remember the key is vital

The key to your NFT wallet is not any common phrase of your choosing. It is a hexadecimal 256-bit number that might even look like an alien hieroglyphics to you. 

You might have heard about the German programmer that lost the key to his bitcoin wallet, which is now worth $250 million. This news is a warning that taking the key to your wallet lightly can cause significant financial loss.

If you lose the key, then there is no forgotten key option. You lose access to your wallet. That’s it. That is why newbies prefer to use a custodial wallet to access their NFT’s even if they forget the password. 

Free and fast transactions

Every time you transact over the blockchain, like selling or buying the best NFT tokens, you must pay a fee. The more you pay, the faster the transaction is. But with custodian wallets, all transactions are free of cost, with the craze with which everybody is buying and selling NFT’s every day. You will save a lot of money if you use custodian wallets.

Superior UI/UX

Custodial wallets have a very user-friendly User Interface. Newbies, as well as expert veterans, can navigate throughout the wallet quickly. Some wallet applications even make the UI similar to banks that most people are familiar with.

Disadvantages of Custodial wallet

Giving up the power of your crypto wallet might seem the easiest and the safest option, but there are some disadvantages to it.

Not your keys, not your crypto.

Undoubtedly, this is a ubiquitous phrase among block-chain veterans who do not prefer using the custodial wallet. With custodial wallets, your funds are never yours. You need permission to access your wallet and your funds.

Moreover, there is a chance that the Third-party might freeze your custodian wallet following governments and companies’ directives, or you might lose access to it because of a data breach.

No offline access

To access your funds and your data, you need to connect to your custodian wallet over the internet. This is a significant disadvantage in emergencies as you cannot access your funds in areas with no internet connectivity and have to wait to get a proper signal.

Need for KYC

According to the government’s directives, you need to fill up KYC forms to operate custodian wallets. Clearly, this defeats the basic idea of using blockchain technology as you lose your anonymity.

Non-custodial Wallet: A Digital Safe

The first choice of most blockchain veterans is to hold on to the key to your wallet. You can save the key in physical drives or your desktop wallets, what you can call getting complete control of your assets.

Non-custodial wallets are tough to use, and you need the key present with you every time you want to access the funds. Along with that, you need to enter 24 alphanumeric numbers. Sounds like quite an effort.

Advantages of Non-custodial wallet 

Let us see why blockchain users favor Non-custodial wallets.

Taking the control back

As people are investing more and more into cryptocurrencies and investing in the best NFT token, they want to remove the third party between them and their funds. Without a doubt, this also works well in the essence of using cryptocurrency, whose aim was to remove third-party institutions like banks.

Low-Risk exposure

Since you are the only owner and no other third party has access to your wallet, it makes it easier to control. Additionally, it also lowers the exposure of your user details and your funds from data breaches and hacking attempts.

Mt. Gox, the World’s largest bitcoin exchange, lost over 850,000 Bitcoins due to a data breach and ultimately had to file for bankruptcy. News like this alerts us that even Custodian wallets are not as safe as they are perceived to be.

Instant Withdrawals

In the case of custodian wallets, you need to take permission from a central authority for all transactions. The non-custodian wallet has a major advantage in this regard, and it also streamlines the process, and you can have instant withdrawals. Besides, it negates the core theme of using cryptocurrency.

Disadvantages of Non-custodial Wallets

Taking control of your funds comes with some disadvantages. Let’s see them.

Your responsibility increases

You are responsible for storing and keeping the key in a safe place. Even the tiniest mistake might lead to a major financial loss. While you are holding your key in physical wallets or desktops, a robbery of the same will lead to major losses.

Bad UI/UX

Non-custodial wallets do not have the superior User Interface of custodian wallets. Particularly making navigation very difficult, especially for newbies and non-tech experts.

Lost key equals lost money.

When you lose the key to your wallet, it essentially means that you have lost the money. There is no other option to recover the money. Undoubtedly it leads to a significant financial disaster for many as users have been locked out of their wallets, amounting to millions of dollars. 

Custodian vs. Non-custodian Wallet: Difference Disclosed

Here we will see the differences between Custodian and Non-Custodian wallets, which will help you choose what suits you the best.

• Custodian of the private key

In a custodian wallet, people give up the control of their key to a third party in exchange for access to a password. You can recover the password if it is forgotten or lost.

But for a non-custodial wallet, you have no option to retrieve it once the key is lost. Here the former comes on top of the latter. 

• Real-time transaction

Custodian wallet transactions do not appear on the chain in real-time. Furthermore, central authority permission is required before any transactions take place. Clearly, this gives the non-custodial wallets a major advantage.

• Security

When it comes to the non-custodial wallet, the key and the user’s data remain intact, hence higher security unless the key is stolen or lost.  

But in the case of custodian wallets, the keys and user data are stored in servers worldwide, which results in breaches and hacking attempts. There have been multiple instances of the same, and it will keep happening until they implement strong security measures. 

• Backup and recovery possibility

The Custodial wallets store the special key with themselves. So, even if you lose entree to data, you can retrieve access by inquiring a third party. 

But, this is not feasible in the case of Non-Custodial wallets where you are a single authority.

• Offline accessibility

One has to log into your Custodial wallet to access funding and related details. Thus it is necessary to have internet connectivity.

But, there is no such provision in Non-Custodial wallets. Thus Non-Custodial wallets are a more suitable option to experience a complete blockchain development environment in real-time.

What Kind of Wallet Should you Choose to Store Assets?

If you are a newbie in the world of NFT and cryptocurrency, you can use Custodial wallet for its superior UI and password recovery options. Choosing the top NFT is only half the game. You need to secure it with the best measures possible in a crypto wallet. Essentially it frees up the worry of losing the key and helps them concentrate on asset building.

Some famous Custodial wallets are – Binance, Bitgo, BitMex, Free Wallet, Blockchain.com.

But non-custodial wallets have seen a higher success among blockchain veterans due to their anonymity, control over funds, and higher security. It all comes down to your choice.

Some best Non-custodial wallets are – Exodus, Zengo, Ledger Nano X, Electrum, Trezor One, Wasabi.

Final Takeaway

The non-custodian wallet has major disadvantages. As more and more people adopt it, there will be some technological advancements where an easier option will replace the alphanumeric key and the antiquated seed.

With that, even custodian wallets are bringing new changes to control their data and make it appealing for crypto enthusiasts. Let’s see what innovation lies ahead in the world of cryptocurrency. 

At the end of the day, it is your money – choose wisely!

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