A cryptocurrency wallet or crypto wallet is a tool or software program or system to access your digital assets, including crypto tokens, coins and NFTs. This wallet has two keys- public and private keys for cryptocurrency transactions. The public key of your crypto wallet is a unique address, like your PayPal address, that you can share with anyone to receive money.

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However, the private key is the password that gives you access to your holdings that live on the blockchains. It is proof of your ownership over your cryptocurrencies like Bitcoin and Ethereum. You can send and receive digital money through your private key. By all means, you need to safeguard the password as it opens all your crypto assets and tokens. If you have lost this password, you cannot restore it and you’ll no longer control your assets. Such crypto wallets are called non custodial wallets.

On the other hand, you can also store your private keys in some wallet or on a third-party server. But, those are not hack-proof yet you have the option to recover the password once it has been lost. This type of crypto wallet is called a custodial wallet.

The crypto investors, especially the newcomers have a keen interest to understand the basic differences between Custodial & non-custodial Wallets and which one to select.

Custodial wallet:

Custodial Wallets

When the third–party is taking custody of your crypto assets, you are using custodial wallets.

Key features:

  • Most web-based wallets are custodial wallets.
  • In this type of wallet, your custodian performs all tasks from storing your private keys to the safe and secure transaction of your cryptocurrencies. Hence, when you buy crypto, you’re very likely using your custodial wallets.
  • If you forgot your password or the private key, your custodian will give you the option to retrieve your crypto key by some complex cryptography software. Hence, there is no chance of losing assets by forgetting the keys and sharing your keys with others in your crypto wallet. This gives the users peace of mind.
  • As you’re handed over the custody of your cryptocurrencies to a third party, you need to select a reliable exchange or service provider as your crypto wallet custodian.
  • Custodial wallets are provided by a centralized exchange like Coinbaase, Binance Custody and many more. 
  • The Payment App Development Companies develop interfaces for the exchanges’ that directly interact with their wallets and the users don’t have to manage the crypto key. This user-friendly feature of custodial wallets attracts new crypto enthusiasts.
  • Some exchanges like Binance custody provide crime insurance coverage or other bespoke insurance coverage based on customer requirements. The users also choose their custodians based on the extra benefits provided by their crypto wallet holders.
  • In these types of wallets, the users select a wallet address to send funds to their chosen platform for transactions. The users have to sign in through the private key to the crypto exchange to perform the transactions. Hence, the internet connection is mandatory for using custodial wallets.
  • These types of wallets are very helpful to connect with decentralized apps (dApps) and financial opportunities like staking or yield farming.

Drawbacks:

  • These types of wallets are not hack-proof and less secured as they are handled by the third-party
  • As all the services of the Crypto Exchange interact with the internet, these are the continuous target of hackers. As a consequence, billions of dollars are lost by cybercrime every year.
  • Custodial wallets demand KYC (Know your customer)/ ID verification for each user to get access to the funds and related services. This verification process hinders anonymity – the fundamental principle of cryptocurrency.

Non Custodial wallets:

Non Custodial wallets

The non custodial wallets follow the old saying, “not your keys, not your crypto”. It is one type of blockchain wallet where you act as your bank. You’ll gain complete control over your funds as you can only access the private key of your funds.

Key features:

  • The non custodial wallets are usually known as the decentralized wallets. In truest form these are Bitcoin.
  • This type of wallet is actually a piece of software on your devices like a computer, phone or tablet that gives you complete access to your cryptocurrency holdings. That means; no one makes a transaction on your behalf from your crypto funds if you don’t share your private key with others.
  • As the third party or any approval is not needed during the transaction, the real-time transaction happens in the non custodial wallets. So, the transaction is fast and easy.
  • Another advantage of the non custodial wallets is straightforward and fast account creation. You don’t have to do any KYC or AML procedure for that.
  • Some notable non custodial wallets are Bitpay wallet, Ledger Nano X, Electrum, Trezor One, and Wasabi.
  • Different types of non custodial wallets exist today:
  • Web-Based Wallets & Mobile Wallets: The browser-based wallets that you can access from any device with a private key login.
  • Software Wallets: These types of wallets store and encrypt theprivate keys on your desktop. But, the risk is if the computer is stolen, you’ll lose your private key.
  • Hardware Wallets:A physical device similar to a USB flash drive that is disconnected from the internet. The signing of transactions using the password has taken place offline within the hardware wallet itself. Then it is sent online to the blockchain for confirmation. Thus, hardware wallets are virtually hacking-proof and impermeable to the malware of the device.

Drawbacks:

  • The private key is a 12 to 24 words seed phrase that encrypts your crypto wallet on your device. You need to store that recovery phrase or seed phrase in a secure location as it is the only decryption key to lock and unlock your crypto funds. If you somehow forget or lose the seed phrase, there is no way to recover your funds. Even if somebody has stolen your keys; you’ll lose all your bitcoins as you’ll no longer have any control over your funds.
  • The user interfaces of these types of wallets are technically critical. It needs some computer knowledge and bitcoin handling experience. So, the experienced crypto enthusiasts are generally using non custodial wallets.
  • Non-custodial wallets provide complete freedom to the users to become their bankers. So, the users have to take all the responsibilities of maintaining the security of their wallets. That is a big challenge for the users as the tiniest of mistakes in handling the wallets could lead to theft, deletion, or unplanned consequences.

The basic difference between Custodial & non-custodial Wallets:

The basic difference between Custodial & non-custodial Wallets

Now you have a clear idea about the key features, advantages and disadvantages of both types of wallets. Here, we’ll discuss the basic differences between Custodial & non-custodial Wallets.

Criteria

Custodial Wallets

Non-custodial Wallets

Fund access Third party accesses the users’ funds. Users have full control over the funds
Fund recovery Easy access of recovery in case of losing login credentials for the wallets. Impossible to recover in case of losing private keys.
Private keys Controlled by third party Controlled by user
Security Lower security due to persistent internet connection Higher security, especially with hardware wallets
Anonymity Not maintained due to KYC verification process Full anonymity has maintained
User-friendliness More user-friendly with interactive UI Technically critical UI

Which wallet is your best fit?

The choice of crypto wallets depends on your requirements and plan for investment. The newbie of the crypto world would prefer custodial wallets for crypto trading as they don’t have to take the responsibility of managing the private key. Moreover, the service of third-party custodians is getting improved day by day in terms of preventing cybercrime, insurance of funds and so on. So, people are more using custodial wallets.

According to the survey of Economic Times, the market players are that the custodial wallets would be the future of Cryptocurrency management and storage due to their easy access, user friendliness and crypto key recovery provision.

On the other hand, if you want to store a heavy sum of cryptocurrency securely and interact with blockchain technology and dApps, non custodial wallets will be the best fit for you. These types of wallets get high-level success among the blockchain veterans as it provides full control over the funds, top-level security and anonymity.

Frequently Asked Questions:

1.  What is the difference between Custodial & non-custodial Wallets?

The main difference between the two cryptocurrency wallets is that the custodial wallets are handled by a third party whereas, in the non custodial wallets, the users are completely responsible for holding and managing their crypto funds.

2.   What are the private keys?

The private key is a 12 to 24 words alpha-numeric code, which is processed by a cryptographic algorithm to encrypt and decrypt your cryptographic data. This secret code or the seed phrase is stored by the Custodial & non custodial wallets.

3.   What are the public keys?

A public key is your crypto wallet’s address. It is used to encrypt outgoing transaction data and receive cryptocurrency from other people. The users must first enter the key to confirm the wallet’s address before moving any cryptocurrency from their wallet. AS it is a public key, you can share it with others for receiving crypto funds.

4.   How do Crypto wallets work?

A crypto wallet acts as a tool or software that works with the interaction with a blockchain network. The Custodial & non custodial wallets allow you to store and transfer your crypto using the connection with a particular blockchain network. If you want a good consultation about using Custodial & non custodial wallets, you need to contact any good Payment App Development Company for that.

Final thoughts:

Most crypto investors use both wallets as both wallets have some advantages and disadvantages. Understanding the basic difference between Custodial & non-custodial Wallets will help you to choose the right one.

By analyzing the comparison between both types of wallets, if you plan to develop the best performing non custodial wallets for your business, connect to a good Payment App Development Company for building such wallets for you.

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Richa Sharma
Author

Enthusiastic for Technology, Richa Sharma has zeal in experimenting with her knowledge of Latest technologies. She keeps on updating her technical know-how thus pinning her name among the topmost COOs and her contribution is penned down by her thorough blogs on various technical aspects. She loves to decipher the latest technologies.

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