Difference Between Custodial & Non-Custodial Wallets

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Today, cryptocurrency is one of the most fascinating subjects on the internet. More and more people are getting associated with it one way or the other. Some are trading, some are buying, while some are just curious about it. Moreover, since many other things are associated with crypto – they come with it. People, however, have started understanding cryptocurrency, but the other things are yet to make their way into everyone’s heads.

 These things are:

  • Cryptocurrency Wallets
  • Custodial & Non-Custodial Wallets
  • Blockchain Technology
  • NFTs
  • Crypto Trading

On that note, today, we will try to cover not all but some of them so that everyone can understand what they are. So, let’s get started.

What are Cryptocurrency Wallets?

Cryptocurrency wallets or crypto wallets are just like the regular wallets you use every day. The only difference is regular wallets are used to store real or fiat currency, while crypto wallets are used to store virtual or digital currency, precisely cryptocurrency. In more exact words, crypto wallets don’t actually store the crypto, but they do store that private key that lets you access the crypto. Now, you must be wondering how it works. So, let’s get this.

How Do Cryptocurrency Wallets Work?

Functions of crypto wallets are not just limited to storing cryptos, but they can also be used to send, receive, & trade cryptocurrencies. There are many types of these wallets depending upon the security and purpose parameters.

Provided by the crypto exchanges, crypto wallets come in many forms like hardware & software wallets. Hardware wallets look like a pen drive. The crypto process works like an account login process to conduct transactions. Like an account has two things – username & password. In the same way, the crypto process too has two things or say keys – a public key and a private key.

The public key is publically available and visible to others. The private key is private, and it has to be kept a secret. To move your crypto from any wallet, you will need both keys. The function of a wallet is to store these keys safely.

The primary two types of crypto wallets are custodial wallets & non-custodial wallets. Let’s understand them one by one.

What are Custodial Wallets?

Custodial wallets mean a wallet having a custodian. A custodian means someone to take care or look after something. Basically, like a guardian. So, custodial wallets are those wallets that are looked after by a third party and not you. You don’t really have complete ownership. You are taking this third party’s help in conducting the transactions, and they know your private key, above all.

What are Non-Custodial Wallets?

Non-custodial wallets are just the opposite of custodial. They provide complete ownership, authority, & access to your private key. No one other than you can see your private key. And you are solely responsible to conduct all your transactions.

For a better understanding, let’s see the difference between custodial wallets & non-custodial wallets.

Custodial Wallet versus Non-Custodial Wallets

Refer to the below table to see the advantages and disadvantages of custodial wallets versus non-custodial wallets.

AttributesCustodial WalletNon-Custodial Wallet
Key ResponsibilityThird PartyYou
AuthorityThe Wallet OwnerYou
PricingHighCheaper
SecurityLowHigher
SupportGoodNot So-Good
KYCYesNo

Let’s talk about the benefits and drawbacks of both of these wallets.

Benefits of Custodial & Non-Custodial Wallets

Custodial Wallets Benefits

  • No Transaction Fee: Custodian wallets are required to pay a one-time fee, and then you are free to use their services.
  • No Data Risk: There is no risk of permanent loss. Since a third party is responsible to take care of your private key – there is no problem even if you lost your key. It’s easy to recover the key – it’s just like a lost password.

Non-Custodial Wallets Benefits

  • Complete Control: You have complete control of your funds & private key. With complete control, comes complete security.
  • Complete Privacy & Safety: When all is you & yours – safety & privacy is natural unless you share the details with any other being.
  • Quick Transactions: When there is no need to get permission from any other party, it really gets quick.

Drawbacks of Custodial & Non-Custodial Wallets

Drawbacks of Custodial

  • Controlling Concerns: Third-party control over your key & funds.
  • KYC Required: No valid documents, no custodial wallet.
  • Data at Risk: No internet, no wallet access – no wallet access, no transactions.

Drawbacks of Non-Custodial Wallets

  • Responsibility Concerns: With complete authority, comes complete responsibility.
  • Can’t Loss Key: If the private key is gone, wallet gone – wallet gone, funds gone.
  • Complex UI: Non-custodial wallets are generally used by mature traders – therefore, they have a complex UI. Beginners may find it difficult to deal with.

Afterthoughts

Crypto is a vast world and we are living in the crypto era. The peak is yet to come and so we should be ready for it. Even if you have nothing to do with crypto – we recommend you to have a bit if not all knowledge about it because you never know when you get to deal with it. Custodial & non-custodial wallets are just one kind – there are many other kinds of wallets as well – about them, you can read here. Many exchanges and individual crypto ecosystems are offering their customised wallets with more advanced and user-beneficial features like the Funex wallet.