There are many different types of cryptocurrency wallets that users who own cryptocurrencies can use to store their assets. Cryptocurrency wallets are generally divided into two categories: custodial and non-custodial wallets.
Cryptocurrencies can be defined as digital assets that do not physically exist. Cryptocurrency wallets, on the other hand, are software and hardware tools that store private keys that help access cryptocurrencies. Cryptocurrency wallets consist of two main components: public and private keys.
When a user wants to make a transfer, the transfer can be made with the addresses generated by the public key of the user's wallet. Therefore, the wallet address and public key can be shared with other users. The private key can be thought of as a secret password, as it signs the transactions and provides access to the funds. But regardless of the wallet type, there will always be a custodial or non-custodial cryptocurrency wallet.
What Is Custodial Wallet?
Custodial cryptocurrency wallets can be defined as wallets where assets are held in custody or escrow for users. A custodial wallet implies that the private key can be held and managed by a third party. In other words, a user using a custodial wallet cannot have complete control over their assets.
The main benefit of having the private key known by a third party, which is a feature of a custodial wallet, is that if the user forgets the cryptocurrency password, they can regain access to the wallet through a third party, customer service. In most cases it makes sense to trust a custodial wallet, but since this also means that the private key is entrusted to a third party, it is very important to choose a platform or service provider that is considered trustworthy.
What Are the Advantages and Disadvantages of Using a Custodial Wallet?
The biggest disadvantage of a custodial wallet is that a third party has management influence over the private key and assets. Most of the time, service providers, i.e. a third party, require KYC (identity verification).
What Is Non-Custodial Wallet?
Non-custodial cryptocurrency wallet refers to a wallet where the private key is controlled only by the cryptocurrency wallet owner. Users using a non-custodial wallet have full control over their assets. Since there is no intermediary, the user can perform cryptocurrency transactions directly from their wallet. Non-custodial wallets are preferred by experienced traders who know how to manage and protect private keys and seed words.
How to Use Non-Custodial Wallet?
When a decentralized exchange (DEX) interacts with a decentralized application (dApp), it requires a cryptocurrency wallet that is under the control of the user and not controlled by a central entity or person. These wallets protect user data, such as private keys and other credentials, allowing users to control and transact with their cryptocurrencies. It gives users more control and freedom and is considered a fundamental component of the cryptocurrency market.
What Are the Types of Non-Custodial Wallet?
There are five types of non-custodial wallets:
- Desktop wallet
- Mobile wallet
- Web wallet
- Paper wallet
- Hardware wallet
Desktop Wallet
A desktop wallet, one of the non-custodial types, can be downloaded to a desktop computer like an app and helps users use the wallet offline, without the need for internet access.
Mobile Wallet
A mobile wallet represents a wallet that can be downloaded and run as an application on a mobile phone. Through a mobile wallet, users can access their wallets from anywhere.
Web Wallet
Web wallets represent wallets that run on an internet browser. When the user accesses the web wallet, the user's wallet information cannot be viewed and stored by the service providers.
Paper Wallet
Paper wallet, which is considered to be the oldest type of non-custodial wallet, represents a paper wallet with the wallet address, private and public key information written on it. The paper wallet can be operated with a QR code.
Hardware Wallet
A hardware wallet is a type of wallet that is considered to have reached the highest level of security. A hardware wallet is likened to a USB stick and can be run on any device that it can be conveniently logged into. It has two-step verification and PIN option. This ensures that the security level of the wallet is high.
What Are the Advantages of Non-Custodial Wallet?
The advantages of using a non-custodial wallet are:
- Full control of the wallet
- No restrictions
- Free from censorship
Full Control of the Wallet
Users with non-custodial wallets have private keys and recovery words that give wallet users full control over their assets. Users with non-custodial wallets only manage their private keys and recovery words themselves. This means that their assets are completely in the hands of the user.
No Restrictions
Transactions carried out with a custodial wallet may be subject to restrictions, such as account freezing by a third party or restriction of withdrawal limits. Therefore, non-custodial wallets are considered independent, as the freedom and responsibility for the assets is entirely in the hands of the user.
Free from Censorship
Non-custodial wallets are considered more secure as users have full authority over their assets and private keys, in other words, their account information is not known to a third party. In the event of a security vulnerability on the platforms, users' assets could be compromised, while users with non-custodial wallets can continue to access their assets because they own their private keys.
What Are the Differences Between Custodial and Non-Custodial Wallet?
Non-custodial wallets refer to a type of wallet where cryptocurrency account information is not known to a third party and is stored without intermediaries. Custodial wallets, on the other hand, are wallets where cryptocurrency account information is known to a third party and stored by intermediaries.
The most obvious difference between a custodial and non-custodial wallet is the location of the responsibility for wallet security. The responsibility for the security of a custodial wallet is held by an intermediary. The responsibility for a non-custodial wallet lies with the wallet owner, the user.
Access to the custodial wallet is only through registered accounts. Non-custodial wallets can be accessed by anyone. Also, while custodial wallets require KYC, non-custodial wallets do not require KYC.
