Custodial vs non-custodial wallet: a primary choice while looking for a digital currency service
Crypto currencies and Blockchain technology are booming over the last several years. While more and more audiences are moving towards the endless possibilities offered by digital currency market, the same primary question on the right service to chose keeps rising. The right service means, of course, secure and reliable yet intuitive and fast. So, what’s best: a custodial wallet or a non-custodial one?
A custodial wallet is a crypto wallet where the private keys are controlled by a third party. It is comparable to how traditional banks control funds of their clients kept on their personal accounts. The custodial wallet structure essentially follows the same rules. The same mechanism of funds and personal information control is applied to the custodial exchanges and exchange services that can be connected to crypto wallets or exist independently. Among the most popular custodial exchanges are Binance, Coinbase, Kucoin, Gemini, Okex, Bitstamp, Crypto.com, etc. These exchange services are also close to traditional banking services flows as these exchanges rely on cryptocurrency funds of their customers while providing these funds to crypto loan services fully controlled by smart contracts.
Thus, custodial wallets functionality implies third party controlling user private keys as far as user funds. This means that the custodial system is much more vulnerable to hacker attacks as all the access data and the transactional volume are stored in one place and become easier to get stolen.
Among the custodial wallet advantages are, of course, easy and fast access to services provided, user-friendly interface, one-place storage, and instant transaction completion. Most of the custodial services offer their clients low fees as far as a large number of tokens and currencies support together with a possibility to process the funds outside the initial service.
Therefore, a non-custodial wallet ensures private keys and funds storage exclusively on the client’s side. This means that either cryptocurrency or wallet access data cannot be hacked or stolen as the decentralized storage implies the top security conditions in the Blockchain world. Non-custodial wallets exist in three modifications: hot ones, cold ones, and a hybrid of these two wallet types.
While hot wallets are the most common non-custodial wallets as they are fully digital without lowering their high security level, cold wallets exist as physical devices remaining offline while unused. Both hot and cold non-custodial wallets do not allow the use of client’s funds as far as do not initiate transactions without the owner approval. Hot non-custodial wallets used the most are Exodus, Trust Wallet, Mycelium and Quppy. The most reputed cold non-custodial wallets trusted by users all around the globe are, of course, Trezor and Ledger.
The key disadvantages of non-custodial wallets consist in a risk of losing access to your funds if private key or seed phrase is forgotten. While every non-custodial hot service reminds its customers of such a risk and a careful attitude to this preliminary access information, some users do face this problem. At the same time, transactions might take longer time and at a higher fee in comparison to the ones being processed by custodial services. Yet, this is exactly the price customers pay for the security of their funds and their own tranquility.
It turns out that the two technologies, the custodial and the non-custodial one, have significant advantages resulting in customer profit and service satisfaction. Depending on your goals, one of the two technologies will become your reliable partner in these aims accomplishment.