Custodial Vs. Non-Custodial Wallets

BeginnerJan 09, 2023
There are two types of Cryptocurrency wallets, namely a Custodial wallet - the private key is held by a third party and a Non-Custodial wallet - the users are in full control of their digital assets.
Custodial Vs. Non-Custodial Wallets

With the increasing adoption of cryptocurrencies and other digital assets, comes the need for users to understand the importance of securing their digital assets. This can be done using cryptocurrency or blockchain wallets which come in two forms, Custodial and Non-custodial wallets.

In this article, we will analyze the basic difference between the two, discuss how each wallet operates, talk about how to create them, and most importantly list some notable examples under each type.

What Is a Custodial Wallet?

A Custodial Wallet is defined as a wallet in which the private keys are held by a third party, that is for example, a ‘centralized exchange’ has full control over the funds while the owner is permitted to carry out transactions; simply put, in Custodial Wallet, a third party controls your Private Keys otherwise known as Seed Phrase, thereby securing your funds and returning them if you want to trade or make a transfer.

So, having a Custodial wallet is like trusting your funds to a friend, or a relative, or keeping your funds in the banks, cooperative firms, or a Crypto Exchange and stating when you will need the funds.

Most Custodial wallets are web-based exchange wallets that allow their customers to send funds or carry out transactions for free; for example, Freewallet allows users to instantly make a transaction within their ecosystem without charging interest. But some others require users to pay a certain fee, hence earning interest per transaction.

Types of Custodial Wallets

  • Luno: this wallet is perfect for those who want simplicity, security, and easy access to their funds. This allows efficiency in keeping track and record of funds.
  • Freewallet: this is another Custodial wallet that keeps funds which means users don’t need to worry about the security of their funds because it’s in safe hands, but this type of wallet is not very common in the cryptocurrency space, though it is easy to use, especially for beginners.
  • Centralized Exchange Accounts such as Gate.io, are also a form of custodial wallets.

What Is a Non-Custodial Wallet?

A non-custodial wallet is one where only the holder possesses and controls the private keys. This is suitable for users who want full control over their funds.

Unlike the Custodial wallet where a third party takes control of your funds, the Non-custodial wallet is entirely different or simply the direct opposite.

Also, in a Non-custodial wallet, the user has full control of the private keys which in turn gives them full access to their cryptocurrency wallet.

Wallets like this enable users to keep proper track of their funds, and transactions are executed without needing the approval or supervision of a third party. Therefore, users feel safe knowing that their funds are properly secured and under their watch.

Types of Non-Custodial Wallet

Non-custodial wallets include:

  • Metamask: this wallet allows users to create ERC-20-based wallet tokens. It also has an in-house swap feature that allows users to quickly exchange one token for another without accessing a decentralized exchange (DEX).
  • Trust Wallet: this is an open-source and decentralized crypto wallet application that offers users a wide range of options to buy, sell, and store digital assets.
  • Coinomi: this wallet provides users with direct access to dApps and multiple Web3 projects. It is an in-house exchange and direct token swaps.
  • My Ether Wallet: It is a free, client-side interface that is designed to help users within the Ethereum blockchain. It is easy to use, although it is a bit more technical compared to others.

Now, having known the meaning of Custodial and Non-Custodial Wallet, we will dive into their differences.

Differences Between Custodial and Non-Custodial Wallet

  • The basic difference between Custodial and Non-custodial wallets is that in the Custodial wallet, the third parties or company take control of the private keys of the wallet, while in Non-custodial wallets, the users are responsible for the safety of their private keys and control their wallet.
  • Furthermore, the Custodian or third party manages all the funding, with the condition that users will not be able to perform any transaction without their involvement. But Non-custodian offers users the opportunity to carry out transactions without the monitoring of a third party.
  • In addition, Non-Custodial wallets are gaining huge acceptance because they provide users with unhindered access to their funds, and the users need not look up to any third party to manage their funding or perform any related activity. This is different from a Custodial wallet, as users must apply and meet certain criteria to access their funds.
  • Moreover, in the Custodial wallet, users are not responsible for protecting the private keys and therefore place full trust in the company keeping the private keys, while in the Non-Custodial wallet, users are solely responsible for the security and safety of their private keys.
  • For Custodial wallets, to access your digital currencies and other digital assets, it is important to have an internet connection, but, there is no such requirement in Non-Custodial wallets.
  • When using a Non-Custodial wallet, users must remember that if they lose the private key, the digital assets in the wallet are practically lost forever, but this does not apply to the Custodial wallet.

How to Set up a Non-custodial Wallet

On your device, download a wallet of choice, which could be any of the wallets mentioned earlier.

Secondly, you can create your account by completing a simple KYC (know your customer) process. During this process, some unique words or phrases would be given, popularly referred to as Recovery Phrase.

Also, endeavor to safeguard the ‘Recovery Phrase,’ because this is important in that you will need them to recover your wallet when opened in a new device.

Lastly, your wallet is ready for use. You can save up your funds, see your current account balance and also carry out transactions across several blockchains.

Conclusion

While Custodial wallets allow third parties to have full control and security of your wallet, non-custodial wallets place the security of the wallet under the user’s control. It is difficult to say which is the best for storing and securing digital assets, as each user has his/her own risk profile and technical knowledge of the sector.

Non-custodial wallets offer more control and ownership over your crypto wallets and security against online fraud, hacking, and malware; Custodial wallets, on the other hand, guarantee the safety of your Seed Phrase and easily retrieve your wallet. Whatever type of crypto wallet you choose, the safety and security of your digital assets should be of priority.

Author: Paul
Translator: Binyu
Reviewer(s): Matheus, Edward, Joyce, Ashley
* The information is not intended to be and does not constitute financial advice or any other recommendation of any sort offered or endorsed by Gate.io.
* This article may not be reproduced, transmitted or copied without referencing Gate.io. Contravention is an infringement of Copyright Act and may be subject to legal action.
Start Now
Sign up and get a
$100
Voucher!
Create Account