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What is the Difference Between Non-Custodial Wallets and Custodial Wallets

What is the Difference Between Non-Custodial Wallets and Custodial Wallets

Are you wondering why you are suggested so many types of crypto wallets as you are about to begin your crypto journey? The answer is simple, different kinds of crypto wallets offer different perks to the users. Many users think that these wallets hold the assets that a user has, but they only store the information regarding the placement of the assets on a blockchain. The major difference between the wallets is related to holding the private key that lets the user access the assets. After hearing from multiple sources, people ask what is the difference between non-custodial wallets and custodial wallets. The differences majorly lie in the way these wallets hold the custody of the user’s private key. 

In this post, let’s see a comparison between custodial wallets vs. non-custodial wallets.

What is the Difference Between Non-Custodial Wallets and Custodial Wallets: What Is a Custodial Wallet?

What Is a Custodial Wallet
Source: Freepik

As the name suggests, a custodial wallet holds custody of the user’s private key for verifying all transactions. Most of the time, a custodial wallet is web-based and is responsible for holding the information to a user’s funds. These wallets are helpful mostly for beginners. Usually, centralized exchanges are the ones that offer such kinds of wallets to the users. You do not have to be worried about your funds even if you forget the password to your account. Restoring the password to the account grants you access to the funds again because the account info is actually stored by the wallet.

Pros 

Based on the services that custodial wallets provide over non-custodial ones, there are several benefits associated with them. Some of the well-known advantages of custodial wallets are:

  • They are easy to use and intuitive, which makes them the perfect choice for beginners who need more knowledge about how to store the private key safely.
  • It puts little responsibility on the users to hold their account information.
  • Users have peace of mind even if they lose the password to their wallet. Resetting the password grants access to the funds, which is not the case when a user loses their private key.

Cons 

Now it is also important to discuss the disadvantages associated with a custodial wallet. Some of the cons of a custodial wallet are:

  • Granting access to the user’s private key puts a risk of theft on the storage of the funds. Hackers only have to target the wallet and can easily gain access to the funds.
  • A major concern for many people is that the private key is held by a third party, which is not a safe option.
  • There is a requirement for KYC and AML.
  • There are not many features available for advanced crypto users.

Notable Custodial Services 

Since many people are just entering the cryptocurrency domain, using custodial wallets is relatively easy. That is why a lot of custodial wallets are quite famous. Some well-known custodial wallet services come from Coinbase, Kraken, Crypto.com, FTX, etc.

What is the Difference Between Non-Custodial Wallets and Custodial Wallets: What is a Non-Custodial Wallet?

What is a Non-Custodial Wallet
Source: Freepik

The only way to prove that you own a crypto asset is to possess the private key to access it. The saying, ‘not your keys, not your crypto,’ has become quite popular across the globe. This is why a lot of critics do not consider custodial wallet users as legitimate owners of the crypto. A non-custodial wallet can be used to tackle this issue as well. 

These crypto wallets hand over complete control of the private key to the users. Every time you access your funds, you will require your private key, which makes using this kind of wallet a bit more technical. Several web-based, software, and hardware wallets function as non-custodial wallets.

Pros 

  • One of the biggest perks of using non-custodial wallets is that the control of private keys is with the user itself. There is no chance of theft or security breaches.
  • Non-custodial wallets are easy to create and even faster than custodial wallets.
  • If the exchange gets hacked, there are zero chances of the user funds being impacted. Since the hackers cannot access the funds without the keys, there is no worry about hacker attacks.
  • There is no requirement for a KYC or AML.
  • They offer advanced features and more functions compared to custodial wallets.

Cons 

  • There have been cases where users lost their private keys and had millions of dollars worth of Bitcoin stored in their wallets. All their funds are now lost and cannot be accessed.
  • It is only for users with technical knowledge related to cryptocurrency and how to operate a non-custodial wallet.

Notable Non-Custodial Wallet Providers 

There are several big names in the list of non-custodial wallet providers. Bitpay wallet is one of the most used and efficient wallets in addition to others like MetaMask, Blockchain.com, Edge Wallet, Exodus, Trust Wallet, Electrum, etc.

What is the Difference Between Non-Custodial Wallets and Custodial Wallets: Which Should You Choose? 

Suppose you are in the middle of choosing a custodial wallet or the non-custodial one. In that case, you should first look at your requirements. The difference between non-custodial wallets vs. custodial wallets is related to holding the private key and the complexity of use. If you are a beginner and need to learn more domain knowledge, choose a custodial wallet that can help you manage your funds easily. On the other hand, if you already have enough experience and want to assert more control over your assets, then non-custodial wallets are the ones for you. They also offer more advanced features to the users.

What is the Difference Between Non-Custodial Wallets and Custodial Wallets: Custodial Wallets Vs. Non-Custodial Wallets

Now, let’s get into our primary topic of discussion: custodial wallets vs. non-custodial wallets.

1. Custodian of Private Key

When it comes to custodial wallets vs. non-custodial wallets, the primary difference between both kinds of wallets is related to private key custody. If the key is held by the wallet, it is a custodial wallet, whereas the non-custodial one grants full control of the private key to the users.

2. Transaction Type 

Now, while discussing custodial wallets vs. non-custodial wallets, another key difference between the two is related to the transaction type. In custodial wallets, the transactions are not reflected in real-time, whereas transactions are updated in real-time in non-custodial wallets.

3. Security 

Custodial wallets often store private keys in hot or cold storage, which are vulnerable to hackers’ attacks. Unless the exchange implements extra security, the parameter is rather low in their case. On the other hand, non-custodial wallets leave complete security responsibility over the users. This is one of the primary factors to consider when it comes to comparing custodial wallets vs. non-custodial wallets.

4. Backup and Recovery Possibility 

In this case, the non-custodial wallets lag behind. If you lose your private key, you have no way to access your funds or data. While the custodial wallets grant easy recovery by just resetting the password to the wallet. This is one of the benefits of trusting a third party to hold your keys.

5. Offline Accessibility 

If you want to access your funds offline, you cannot do so in custodial wallets. There is a requirement for permission to access from the central authority. However, people using non-custodial wallets have the liberty to store their funds offline in a cold storage vault. This is something you should definitely keep in mind when you wonder ‘What is the difference between non-custodial wallets and custodial wallets?’

6. Future Scope 

With the growing knowledge of crypto and people fearing data breaches, it can be said that non-custodial wallets will gain more popularity. They provide safety and complete control over the funds, which is preferred by every user.

7. Examples 

There are several examples of non-custodial wallets, such as MetaMask, Bitpay, Exodus, and Blockchain.com. Out of these, Bitpay has a very large user base. On the other hand, examples of custodial wallets are Binance, Coinbase, Kraken, etc. Notably, Binance is one of the biggest crypto exchanges in the world. 

Conclusion 

Now that you know what is the difference between non-custodial wallets and custodial wallets, it would be easier to understand that the non-custodial ones might be the future of storing crypto. It offers a highly encrypted and trusted method of storing funds. On the other hand, custodial wallets do not stand true to the decentralization purpose of crypto. Users still give their funds’ access to a third party. 

Still, when comparing the merits of custodial wallets vs. non-custodial wallets, you must take into account that custodial wallets are still a requirement for all the people who are new to the crypto space. So, in case you are wondering which wallet to choose, you must first understand your requirements and only then make a decision.

Frequently Asked Questions (FAQs)

1. Is BitPay a Non-Custodial Wallet?

Considering that Bitpay offers complete control over their funds and easy-to-buy, store swap, and spend them from a single platform, it must be called a non-custodial wallet. It offers integration with Coinbase as well and helps keep the funds secured.

2. Are Coinbase, Kraken, and Crypto.com Non-Custodial Wallets?

Among these, only Coinbase is the one that has a separate standalone non-custodial wallet app to offer. Apart from that, all these wallets are custodial ones only.

3. How do I Create a Non-Custodial Wallet?

Usually, it is very easy to create a non-custodial wallet for the crypto assets you want to store. Firstly, create a 12-character recovery phrase or private key to be kept safely. And then, sign up on the exchange and enable the cryptocurrencies for which you want a wallet.

4. What are Private Keys?

Private keys are a series of alphanumeric code that is to be combined with a public key to access funds stored in a crypto wallet. It is usually 12 to 16 characters long.

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