Crypto Wallets: Custodial vs. Non-Custodial

Choosing the Best Crypto Wallet For You

For anyone new to the crypto space, analyzing all the different types of crypto wallets available can get confusing.Hot, warm, cold, hardware, custodial, self-custody, non-custodial, and many more terms are used to describemethods of crypto storage.

Each type of wallet serves a purpose, and it usually comes down to personal preference of the features andfunctionality each investor thinks is most important.

In this article, we'll dive into the custodial vs. non-custodial wallet debate. You’ll find out what each is, the benefits, and the risks.

By the end, you should have an understanding of which type of crypto wallet will be best for you.

What Are Crypto Wallets?

Before getting started, you need to know how crypto wallets work.

Unlike the wallet in your back pocket, you won’t find any money in crypto wallets. Rather, all your cryptocurrency is stored on the blockchain. The purpose of the wallet is to secure your public keys (wallet address) and private keys (the code or phrases you use to initiate transactions).

So, crypto wallets exist to protect your crypto while it’s on the blockchain—not to store the crypto itself.

What Is a Non-Custodial Wallet?

Often considered one of the most secure methods of storing crypto, a non-custodial wallet gives investors complete control over their cryptocurrency portfolio.

Non-custodial wallets come in multiple forms. Usually, they’ll be browser or app-based. A browser-based non-custodial crypto wallet is accessed via a plug-in or extension.

Alternatively, an app-based wallet will either be on your smartphone or tablet. So, how andwhy do investors have complete control?

When creating the non-custodial wallet, a seed phrase of 12 words will be randomly generated. This seed phraseis used to access both private and public keys. Additionally, it is the recovery phrase should a user lose the devicewhere the wallet is stored.

No one else is given this information. You are responsible for securing it. If you lose the seed phrase or privatekeys, your crypto is gone forever.

Do you see how you’re in complete control?

What Is a Custodial Wallet?

Custodial wallets are crypto storage methods that investors do not retain control of. Instead, a third party, or custodian, is the owner of the keys.

The most notable examples of custodial wallets are exchanges. So, if your cryptocurrency is stored on an exchange, such as Binance or Coinbase, you’re using a custodial wallet

This means that the third party you’ve chosen has complete control over the crypto assets. Therefore, at any point, the exchange could restrict your access to the funds, prevent you from withdrawing them, or worse,remove them altogether.

The Benefits & Risks of Non-Custodial Wallets

Benefits of Non-Custodial Wallets

●      Complete control over and full ownership of your crypto assets.

●      Direct interaction with blockchain and no middleman restricting your activity.

●      Can implement your own security measures.

Assuming full control of your cryptocurrency means you’re wholly responsible for protecting it.

Also, it means you can use it however you wish. Some custodial wallets restrict the defi applications you can interact with and cryptocurrencies you can purchase, but with non-custodial wallets, you have freedom.

In addition, you are the only person with access to the seed phrase and private keys. This allows you to get as creative as you like with security. For example, moving your private keys offline makes it harder for hackers to target you.

Risks of Non-Custodial Wallets

●      The potential loss of private keys or seed phrases.

●      Difficulty recovering lost cryptocurrency.

●      Less user-friendly than some custodial wallets.

With the responsibility of full ownership comes more risk on your part. If your crypto is lost or stolen, no one is responsible but you. We’ve seen many occasions where users have not stored their private keys effectively,then lost or broken the device their wallet is stored on, meaning their crypto is lost forever.

Also, some non-custodial wallets are not as user-friendly and require more hoops to jump through. When you firstmake the switch to non-custodial, it’s important to be patient and learn how it works.

The Benefits & Risks of Custodial Wallets

Benefits of Custodial Wallets

●      Potential account recovery when passwords are lost.

●      Easy-to-use interfaces.

●      Simple and rapid set-up.

Usually, custodial wallets are the first crypto wallets a newbie will get—they’ve been designed to be the most user-friendly and self-explanatory. The user interfaces are familiar and can be navigated by almost anyone without difficulty.

What’s more, if you lose or forget your password, there is a chance you will be able to recover access to it and your funds.

Risks of Custodial Wallets

●      Users cannot claim ownership of the crypto assets.

●      The custodian dictates security measures.

The two major risks with custodial wallets that cannot be overlooked are lack of ownership and zero control. As you do not own the private keys or seed phrases, you do not technically own the assets in the wallet.Although they’re in your account, you can't access them anywhere apart from the custodian's platform.

On top of that, you cannot implement your own security measures. If the custodian is targeted maliciously, yourassets are at risk, and you can’t do anything about it.

In Summary

All crypto wallets have their pros and cons. However, if security is a primary concern for you (which it should be),then you should opt for a self-custody wallet. It may take a little longer to get to grips with the interface andfeatures, but it’s the most efficient and user-friendly way of protecting and owning your crypto.

Check out Escrypto for non-custodial wallets that provide institutional-grade security to retail investors.