Custodial vs. Non-Custodial Wallets: What’s the Difference?

Token holders can keep their cryptocurrency in a variety of different sorts of wallets. However, they can be broadly divided into two groups: custodial wallets and non-custodial wallets.

A custodial wallet, like Binance Custody, is a service that maintains your funds in custody and owns the private key to your wallet. A custodial wallet can also be found in your ordinary Binance account. Using a non-custodial wallet, on the other hand, gives you sole ownership of your assets. Examples of non-custodial wallets are MetaMask and Binance Chain Wallet.

You can also read: Top 6 Dual Investment Trading Strategies

Custodial and non-custodial wallets have their own pros and cons. Let’s examine their distinctions to help you determine when to employ each one.

If you’ve ever used Bitcoin or other cryptocurrencies, you are aware of how important it is to have a digital wallet. If you want to conduct trades, transact on a cryptocurrency exchange, or use blockchain applications, you will require one. Because of this, it’s crucial to comprehend how bitcoin wallets operate and what sets non-custodial and custodial wallet providers apart.

How crypto wallets work

A public ledger known as blockchain stores data in units known as “blocks.” All transactions, amounts kept at each address, and the person in charge of those balances are listed in these records. Cryptocurrency isn’t actually kept “in” a wallet. The wallet program enables you to communicate with the balances kept on the blockchain, where the coins are stored. The wallet itself stores addresses, enables their owners to transfer money to new addresses, and makes it possible for others to view the balances kept at each address.

Using a crypto wallet to transfer or receive money involves the following general processes, however each wallet has its own unique nuances:

Receiving

You must take an address (sometimes referred to as a public key) out of your wallet in order to receive money. When you are about to receive a digital currency from another person, you should find and click on “create address” option in your wallet, then copy the alphanumeric address or QR code and give it to them.

Sending

You must the receiving wallet’s address in order to send money. To transmit coins to another wallet, find the “send” feature in your wallet and enter the address of that wallet. Click “confirm” after selecting the quantity of cryptocurrency you want to send. Before sending substantial sums of cryptocurrency, think about sending a tiny test transaction. Keep in mind that in order to send bitcoin, a fee must be paid, which goes to the miners in return for handling the transaction.

It may initially appear unusual to send money using QR codes or lengthy strings of numbers and letters. But once you have done it a few times, the procedure becomes really easy.

What is a custodial crypto wallet?

A custodial cryptocurrency wallet is one where your assets are kept in custody on your behalf, as the name implies. This means that the users’ private keys become on hold and managed on their behalf by a third party. So, they cannot sign transactions. They also do not have a complete control over their money. but, employing a custodial cryptocurrency wallet service is not always a bad idea.

All users were required to establish and maintain their own wallets and private keys in the early days of Bitcoin. Being your own bank has many advantages, but for less seasoned users, it can be inconvenient and even dangerous. You will permanently lose access to your crypto assets if your private keys are stolen or compromised.

There have also been occasions where crypto inheritance was lost because only the original crypto owner had access to the secret keys. Sharing access to your assets with a custodian can help you avoid such incidents.

You should still be able to access your account and assets by getting in touch with customer care even if you accidentally forget your bitcoin exchange password. However, you are in charge of keeping your cryptocurrency secure if you use a non-custodial wallet.

So it makes sense to use a custodial wallet service in many situations. However, doing so also implies that you are giving a stranger access to your private keys. Because of this, picking a trustworthy exchange or service provider is crucial.

When researching custody service providers, some details to keep an eye out for include if the company is regulated, what services you receive, how your private keys are maintained, and whether there is insurance.

For instance, basic insurance for business Binance accounts is provided by Binance Custody, which is both regulated and compliant. Additionally, it provides crime insurance coverage and other specialized insurance needs that are available upon request. Additionally, Binance Custody makes use of multisig wallets, a system that reduces centralized risks by necessitating the consent of many parties to execute cryptographic transactions.

What is a non-custodial crypto wallet?

There’s a cliche in the crypto community that goes, “Not your keys, not your crypto,” which effectively means the only real and verifiable owner of the money in a wallet is the person who owns the private key. According to some cryptocurrency users, because they don’t have access to the private key, users using custodial wallets don’t genuinely “own” their cryptocurrency.

A cryptocurrency user has total control over both their private key and their money while using non-custodial wallets. Experienced cryptocurrency users typically prefer non-custodial wallets more since they are typically a little more technically sophisticated than custodial wallets.

There are various non-custodial wallet types, some of which are browser-based. On a computer’s hard disk, software wallets securely store and encrypt private keys. But a hardware wallet is the most secure sort of all. Hardware wallets are online only when linked to a computer or mobile device, and they resemble USB thumb drives. Once the device comes back online, the private key is used to sign transactions, which are then forwarded to be verified by the blockchain. Because of this, non-custodial hardware wallets are essentially hacker-proof.

Users using non-custodial wallets have the autonomy to manage their own finances, but this independence entails greater responsibility. You can reset your custodial wallet provider account password if you forget it with a few emails and possibly some identification verification. However, you could be unable to access your money if you lose your hardware wallet or your private key.

Thankfully, lots of non-custodial wallet suppliers offer consumers a “seed phrase” or recovery phrase. This phrase, which comprises of 12 to 24 random syllables, can be used to retrieve a password even if a wallet is lost, deleted, or destroyed. But because anyone with the seed phrase can access the account, it should be protected just as rigorously as your private key.

In the end, the main drawback of non-custodial wallets is what this all comes down to. There will be no way to get your money back if you somehow lose your private key, wallet, and seed phrase.

Custodial vs non-custodial wallets

We can compare Custodial and non-custodial wallets from different aspects like:

Custodian of private key

Who controls the private key is the most important consideration when contrasting custody-based vs non-custodial wallets.

With Custodial wallets, a third party is in charge of managing the private key. All of the blockchain custodian services are provided by users in the case of non-custodial wallets.

Create non-Custodial blockchain wallets, sometimes referred to as self-custodial wallets, if you wish to launch a wallet where users can act as their own bank.

Transaction type

The transaction type should be taken into account when comparing custodial and non-custodial crypto wallets. The transaction is immediately reflected as Non-Custodial on the chain. However, this is not the case with the Custodial wallet. This once again demonstrates that the former runs the show.

Security

The sensitive user data for custodial online cryptocurrency wallets is kept in hot and cold storage, both of which are frequently breached by data thieves. As a result, custodial security is low unless the authoritative party takes significant security measures.

Contrarily, in the comparison of non-custodial crypto wallets, users retain full access to the data. This lessens the chance of data theft, unless the user discloses the information to a third party or has their device stolen.

Therefore, Non-Custodial wins the Custodial vs Non-Custodial wallets battle in this aspect.

Backup and recovery possibility

Self-custodial wallets or non-custodial crypto wallets fall short of the custodial one in terms of backup and recovery options.

The private key is kept by the Custodial wallets. In other words, even if you lose access to data, you can get it back by asking a third party.

In the case of non-custodial wallets, where you are the only authority, this is not possible.

Offline accessibility

You must enter into your Custodial wallet and submit a request to a centralized authority in order to access your funding and the associated information. Internet connectivity is therefore essential.

However, non-custodial wallets do not have this requirement. As a result, non-custodial wallets are a preferable choice if you want to take use of comprehensive blockchain development capabilities in real-time.

Future

According to market trends for cryptocurrencies, non-custodial wallets will continue to outperform custodial wallets because of the rising number of data breach incidents and users’ increased concern for the security and privacy of their personal information.

Pros and cons of custodial wallets

It’s quite likely that the first time you buy cryptocurrency, it will end up in a custodial exchange crypto wallet because the majority of web-based cryptocurrency wallets are custodial wallets. In this instance, the exchange is your custodian, who is in charge of keeping your keys safe and securing your funds. Use a trusted custodial wallet, like those provided by significant U.S. cryptocurrency exchanges, where the majority of customer money are housed in cold storage hardware wallets and are extremely safe.

Although many people choose non-custodial wallets since they don’t demand as much responsibility and are typically more handy, custodial wallets may be thought of as less secure than custodial wallets. If you don’t take enough safeguards, losing your password to a non-custodial wallet could have disastrous financial consequences. However, you should be able to reset your exchange account password if you forget it. For the best protection of the digital assets in your crypto wallet, be sure to adhere to the exchange’s security recommendations.

Purchasing cryptocurrency ETFs and ETPs is another alternative for custodial wallets. These more recent options are becoming more and more popular, particularly among institutional investors looking to increase their exposure to cryptocurrencies and tokens. They provide a way to invest in cryptocurrencies without having to deal with keys or blockchain transactions.

However, they impose higher fees and only give access to a small subset of the trading pairs and cryptocurrencies available on exchanges.

Pros and cons of non-custodial wallets

Non-custodial wallets provide you total control over your keys and money without the need for a third party guardian. In other words, you can act as your own bank and your assets are actually yours. Additionally, since you don’t have to wait for withdrawal clearance, non-custodial transactions frequently happen more quickly. Last but not least, if you don’t use a custodian, you won’t pay additional custodial fees, which can be expensive depending on the service provider you pick.

As we’ve seen, accessibility and usability are two drawbacks of using non-custodial wallets. They typically cause issues for new cryptocurrency owners and are less user-friendly. This should be remedied in the future when non-custodial service providers develop.

Naturally, you are also solely responsible for your keys and must exercise your own prudence when handling them. This indicates that you must trust yourself to manage your finances rather than putting your trust in another one.

 You should take into account the following security steps to safeguard your cryptocurrency and defend yourself from hackers:

• Employing a secure password

• Making two-factor authentication (2FA) available as an additional layer of security

• Keeping an eye out for fraud and phishing attempts

• Exercise caution while downloading new applications and visiting links

Which wallet type should I use with my crypto?

You can store your crypto assets, including NFTs, using either sort of wallet. Most traders and investors employ both in various circumstances. You should, however, confirm that the wallet you select supports the kind of cryptocurrency you intend to store. Not all of them can be kept in the same manner.

There are numerous blockchain networks that operate different kinds of cryptocurrencies. Although we may have the same tokens operating on many blockchains under various standards, we can categorize these types based on their token standards. For instance, BNB is available both as a BEP-2 token and a BEP-20 token on the BNB Beacon Chain.

Some of the most popular token standards are listed here:

• BNB Smart Chain’s BEP-20, BEP-721, BEP-1155
• BNB Beacon Chain’s BEP-2
• Ethereum’s ERC-20, ERC-721, ERC-1155
• Solana’s SPL

The most typical and well-liked crypto assets are supported by the non-custodial wallets MetaMask, Trust Wallet, and MathWallet. If you’re unsure of what tokens your wallet supports, you may find out by consulting their official FAQ or documentation.

Wallets that are regularly updated to satisfy user demands occasionally support more tokens as time goes on. For instance, Binance Custody presently supports a wide range of ERC-20 tokens, including BTC, ETH, BCH, LTC, BUSD, BNB, and CAKE. To meet user demand, Binance Custody will progressively add more token types.

In conclusion

Do you prefer a custody- or non-custodial wallet? Both are commonly used by crypto users, however it all depends on your demands. Consider a non-custodial wallet if you prefer to maintain complete control over your assets or if you merely want to use blockchain technology to communicate with DeFi applications.

nevertheless, you can look for reputable custodial wallet service providers if you’re looking for a company to handle your storage needs while you trade or invest.

Remember that you should exercise caution and follow best practices whether you are using a custodial or non-custodial wallet to increase the security of your money.