Into The Blockchain: Custodial Wallet vs. Non-Custodial Wallet

Let’s get to know the differences between them.

If you’re into buying and selling cryptocurrencies, chances are you’re using a cryptocurrency wallet right now to store these digital currencies. Technically, cryptocurrencies are not kept in a cryptocurrency wallet but it allows users to communicate with blockchain networks by generating one or more pairs of public and private keys. Through these keys, users can communicate with these blockchain networks to receive or send digital currencies such as Bitcoin, Ethereum, and many more. The ownership of these keys may be classified into two types of cryptocurrency wallets called a custodial wallet and a non-custodial wallet.

Now, let’s define what are these types of cryptocurrency wallets and the pros and cons of these crypto wallets from each other.

Custodial Wallet

Definition

A custodial wallet is a type of crypto wallet where your private keys are stored by a third party. Thus, the third party has full control over your funds with the permission that you can send or receive payments.

Advantages

• You can perform free transactions within the custodial wallet ecosystem.
• You can regain access to your custodial wallet if you ever lose your private key since a third party manages your custodial wallet.
• You have a higher backup possibility since there is a third party that acts as a custodian of your funds. This is helpful when you want to stop or cancel any transaction and also during the restoration of the previous version.

Disadvantages

• You don’t have full control over your funds since the third party acts as the custodian. They can freeze funds when they deem it so.
• You need to undergo Know-Your-Customer (KYC) verification process to access services provided by the custodial wallet. This somehow negates one of the principles in blockchain technology and cryptocurrency which is anonymity.
• You might lose your funds if the third-party service provider gets hacked or undergoes a fork in the system.

Examples

Some examples of custodial wallets are Binance and Coinbase.

Non-Custodial Wallet

Definition

A non-custodial wallet is a type of crypto wallet where you have full control of your funds and the associated private keys that come with it.

A non-custodial wallet gives two types of private keys to perform a transaction.

1. A mnemonic seed is usually a value of 12–24 words made to embody the real private key. Stored in the user’s devices, the mnemonic seed allows the access of multiple accounts simultaneously.
2. An alphanumeric string, that contains any letters from A-Z and some numbers from 0–9, is the real private key in raw form which is also stored on the user device.

Advantages

• You have full control over your funds.
• You hold all the details about your crypto wallet. This means that there is a much lower risk of data breaches.
• You enjoy a higher level of security through a combination of hardware wallets or paper wallets.

Disadvantages

• You can lose access to your non-custodial wallet if you don’t properly store or take care of your mnemonic seed or alphanumeric string.
• You might find it difficult to trade your cryptocurrency quickly so you must send it to an exchange platform first.
• You might encounter a user interface that is hard to understand.

Examples

Some examples of non-custodial wallets are Ledger, Trezor, Exodus, and SparkPoint Wallet.

There are a lot of applications that can serve as your cryptocurrency wallet but you always need to be careful in choosing what type of cryptocurrency wallet you will use. It is important to understand the advantages and disadvantages between a custodial and a non-custodial wallet to understand which will fit your needs. Doing your own research (DYOR) is always a good mindset to practice as you go along in the cryptocurrency space.

Learn more about SparkPoint and SparkDeFi from the following links:

SparkPoint Website: https://sparkpoint.io/
SparkDeFi Website: https://srk.finance/
SRK-ETH on Uniswap: https://srk.sh/uniswap
Trade SRK: https://srk.sh/trade
Telegram Announcements: https://t.me/sparkpoint
SparkDeFi Telegram: https://t.me/SparkDeFi
SparkDeFi Twitter: https://twitter.com/SparkDeFi
SparkDeFi Facebook: https://www.facebook.com/SparkDeFi
SparkDeFi Instagram: https://www.instagram.com/sparkdefi/
LinkedIn: https://www.linkedin.com/company/sparkpointio
GitHub: https://github.com/sparkpointio
CoinMarketCap: https://coinmarketcap.com/currencies/sparkpoint/