Custodial vs Non-custodial wallets: Why are they important?
As the adoption of cryptocurrencies is gaining momentum across the globe, it is of the utmost importance to create solutions that will increase mass adoption of blockchain technology. Wallets are, obviously, the most used applications every cryptocurrency holder uses.
Cryptocurrency wallets are the epicentre where users store, manage and use their digital assets.
In this article, I would like to talk about the differences between custodial wallets and non-custodial wallets and why it matters to choose one over the other.
Let us take a look at the current wallet ecosystem basics before we do a deep dive into the types of wallets.
What is a cryptocurrency wallet and how does it work?
Cryptocurrencies can be obtained by purchasing them through an exchange, accepting them in exchange for a product or service, mining, staking, and many other mechanisms.
For example, you could purchase a cryptocurrency on a centralized exchange, or you could receive them from someone as a mode of payment, gift, rewards, and more.
In order to store the currencies, you would need an application known as a wallet. This wallet would issue a unique address which would act as a unique identifier pointing to the location of your currency on-chain. You can use this wallet to interact with the blockchain, and execute several types of orders.
Each wallet is associated with a public key and a private key. The public key is your public account address which you can share with others to receive cryptocurrency. The private key is like your password which keeps your funds safe and locked.
Some types of wallets will ask you to register with a login and a password. Others will provide a seed phrase, also known as a mnemonic key. These two types of wallets may function in a very similar way, but their ability to secure your funds is radically different.
It is important to understand how to safeguard your wallet’s private key in order to safeguard your funds. If the private key of a wallet is compromised, the funds can be stolen quite easily. Just like the keys to your car or your home. In order to solve this problem, there are several unique solutions that are being built in the industry today — for example, hardwallets. But that is the topic for an entire article in itself.
What are the different types of wallets that can store your funds?
Let us start with the first category of wallet: A Custodial Wallet
What is a Custodial Wallet?
A Custodial Wallet is like a digital safe where your funds are stored but its key lies with someone else for safekeeping. This is how traditional banks work. You deposit your funds and trust them to keep them safe. Same for a centralized exchange.
Custodial wallets store the customer’s private key for them (along with many other personal data points) and promise to secure their assets by providing a way to back up their assets.
In a custodial wallet, the entire responsibility for the user assets is on the central authority, for example, a broker or an exchange. And everyone knows how that can go terribly wrong. From defaulting banks to hacked exchanges — the result is always the same.
This solution has been widely adopted in the crypto space due to the recent ease of use to newcomers, and the reduced burden on the user end when it comes to basic security. Still for most, a brave new world.
CardWallet fixes all that. Read on.
What is the problem with Custodial Wallets?
Custodial wallets are not completely decentralized and pose a huge risk to the security of your cryptocurrency assets. Letting someone else hold custody over your assets would mean that if a custodial wallet turned malicious, there is really no way for you to retrieve your funds! Or if a hacker compromises the system and steals your funds, little or nothing can be done about it.
All of the centralized exchanges used for crypto trading are custodial wallets where your private keys are stored within the exchange’s custody. Most of the cryptocurrency hacks originate from custodial entities where users do not have control of their own data, and it gets stolen. They are a central point of failure, and a honeypot for hackers.
The list is long and tedious for us to list, but please do your own research on how many exchanges have been hacked since 2009 when Bitcoin first came to life — until today — and how that list just keeps growing. Billions of dollars stolen from unsuspecting regular folk, just like you and me, for trusting third parties with the responsibility of holding their own funds and trusting others!
However, in this rapidly evolving ecosystem where the power is truly meant to be decentralized, we have a solution for the above-stated problems in the form of an elegant Non-Custodial Wallets with FIAT on and offramps.
What are Non-Custodial Wallets? Why are they important?
A Non-custodial wallet is like a digital safe whose combination lies only with you.
They are decentralized wallets where customers own their own private keys.
In these types of wallets, your assets cannot be compromised by one centralized entity.
With the growing need for privacy and protection against malicious attackers, the adoption of non-custodial wallets has increased exponentially in the past couple of years.
What are the benefits of having a non-custodial wallet?
Some of the noteworthy benefits of having non-custodial wallets are:
- You are in full control of your assets, 24/7 without interruption.
- You do not need to give up any private information in order to access or move your funds.
- You do not need the authorization of any third party to access or move your funds.
Non-custodial wallets are much safer than custodial wallets as they are virtually impossible to be hacked.
Just like the keys to your car or home, the hacker would need to have physical access to your mnemonic seed phrase. So keep them safe, and never share then with third parties!
We will teach you how in subsequent articles, but, it is common sense, made much easier once you download the app and follow the steps... how many tutorials have you ever needed on how to keep your car keys safe from robbery? That is it, in a digital nutshell.
Non-Custodial Wallets: pros and cons
As you can see, custodial wallets have been popular because they offer an easy way to store crypto for both new and experienced users alike.
Non-custodial wallets have been tagged as “difficult to understand” or “too complex” for non-native crypto users, however upcoming innovations in the industry are striving to achieve the same user experience as custodial wallets while maintaining decentralization as its core principle. Such is CardWallet.
Why does it matter, and what kind of wallet should I choose to store my assets?
Non-custodial wallets are designed to fulfill the purpose of decentralisation and security. They delegate the power to the users which would help them become a significant part of this rapidly innovating technology ecosystem.
No one can seize your funds. No one can freeze your account.
Given that we are all striving towards a more equal and secure world, non-custodial wallets would be an obvious choice to manage your cryptocurrency assets.
Every software product that you use, from your online banking to applications like Gmail, Twitter or Facebook — just to name a few — they monitor and keep records of your data continuously.
In a world where privacy is considered to be a myth, non-custodial wallets bring a breath of fresh air and increased security to your cryptocurrency life.
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