Custodial vs Non-Custodial Wallet: Which One Should I Use?
If you own a cryptocurrency, you have probably interacted with a crypto wallet through an exchange, through an app, or via web plugin.
Unlike your TradFi wallet, your crypto wallet does not necessarily hold your digital assets, but rather, it gives you access to your coins and tokens on the blockchain, through a set of password phrases called a private key.
Who holds the private key?
A custodial wallet holds your private key and acts as the caretaker of your funds. You are entrusting the centralized entity to take safeguard your funds, just like how you trust your fiat money in a bank.
A non-custodial wallet, on the other hand, gives you full ownership of your private key, making you solely responsible for its protection. For better or for worse.
Custodial Wallet
Custodial wallets are usually provided by centralized companies or exchanges such as Binance and Celsius.
Private Keys: You don’t need to list down any password phrase in a custodial wallet. What you do instead is create an account with the wallet provider, and they take care of the rest.
Custodial wallets are more forgiving for people who are always forgetful of their passwords. Just like when you forget your password on Facebook, most centralized exchanges have an option for you to recover your account and your funds should you forget your login credentials.
Complexity: You don’t normally notice that you are using a custodial wallet because it’s designed to be that way. They have a user-friendly interface that is ideal for beginners who prefer convenience. Also, most centralized apps have incorporated NFTs and DeFi on their app, so sometimes you don’t need to get out of their ecosystem, making it way easier to do transactions.
Security: Since you are not in the custody of your private keys, you would have to trust the centralized provider that will take care of your assets. You would have to be KYC-ed by them too, for regulation purposes.
Centralized exchanges have been prone to hacks in the past, resulting in billions of losses due to theft. You could even lose your funds if the government freezes the exchange, or the exchange itself becomes bankrupt, like what happened to Celsius because most of them are not insured by the FDIC.
Non-Custodial Wallet
There’s a saying in crypto: “Not your keys, not your coins”. This means that whoever holds your private keys has full authority over your assets. And, if that’s not you, then you don’t really “own” it.
Illustrative examples of this type of wallet are Metamask, Trust Wallet, and imToken Wallet.
Private Keys: In a non-custodial wallet, you have full ownership of the wallet and your coins. To create a non-custodial wallet, you would have to list down 12 or 24 phrases, and remember them for life.
These phrases must be never shared with anyone and must be kept as if your life depends on them. If you lose it, no one can help you; you’re on your own.
Complexity: Non-custodial wallets can be a bit more complex and would require at least basic to moderate crypto knowledge. From choosing your wallet to connecting them to Web3 apps, it can be quite delicate so it must always be processed with great attention to avoid losing your funds.
Non-custodial wallets can be in a form of a hot wallet or cold wallet. A hot wallet is connected to the internet most of the time, so they come in a form of an app or a web plug-in, while a cold wallet is real hardware where you can store your assets even without being connected to a network.
Security: The security of a non-custodial wallet relies on your hands. You may have full ownership and authority for your funds, yet, you are also solely responsible for them. It’s uncommon to be KYC-ed in most non-custodial wallets.
The only way you could be prone to hacks is if you unknowingly give out your password phrases to someone, or if you connect and sign off transactions to unreliable sites.
Conclusion
Custodial and non-custodial wallets surely have their own benefit, to each of their own. Deciding whether to use one or the other is largely a matter of which feature matters more to you.
Custodial wallets are generally preferred by beginners, or by people who want fewer complexities, as long as they can do the transaction they need to do.
Non-custodial wallets are more appealing to more experienced crypto enthusiasts, who want to assert more independence, control, and ownership of their funds.
There are pros and cons for both, and let’s not remove the option of using both at the same time, for different purposes.
