What's the Difference Between Non-Custodial and Custodial Crypto Wallets?
The number of crypto wallet users continues to increase, according to data from Statista. The trend points to accelerating demand for cryptocurrencies, as Bitcoin is regarded as an inflation hedge tool amid aggressive cash injection from central banks while DeFi continues to make waves.
All in all, the proportion of newcomers is overwhelming, and if you’re one of them, the big question is: should you go for custodial wallets or the non-custodial ones? In order to make the correct decision, you should know the fundamental differences between custodial vs non-custodial wallet options. Understanding the main distinctions is important because what is at stake is control over your crypto funds.
What is a custodial wallet?
Most beginners initially interact with the crypto market through custodial wallets. In a nutshell, a custodial wallet is the one in which the private keys are stored by a third party.
The private key is a complex cryptographic code that lets you spend or transfer cryptocurrencies related to a digital wallet. You can compare the private key with the code of a safe where you hold jewelry and cash or the PIN code of a credit card. You’d be interested in keeping this secret key to yourself and never share it. Without the private key, users cannot authorize any cryptocurrency transaction. In other words, you wouldn’t be able to access your crypto holdings without this code.
Since custodial wallet operators store the private keys, they have full control over the users’ crypto funds. Users are able to send or receive payments from the custodial wallet, but they are not directly responsible for storing the crypto funds and keeping them safe.
Most of the centralized cryptocurrency exchanges out there provide custodial wallets. Think about Coinbase, Binance, Kraken, you name it. Here are the main aspects of a custodial wallet that you should be aware of:
Third-party involvement – a custodial wallet is usually run by a third-party entity like a cryptocurrency exchange.
Wallet security – the third party is generally financially responsible for the safety and protection of your assets. Passwords and keys are held in trust by the custodian.
Identity – most custodial wallets would require you to pass through a KYC (Know-Your-Customer) verification procedure, given the increasing pressure from regulators worldwide. However, this is not a rule.
Custodial wallet pros and cons
Why would anyone go for custodial wallets if the private keys are held by a third-party? Well, it’s because of convenience. To access your funds, you have to interact with the third-party’s interface. You don’t have to understand all the technical intricacies of dealing with a digital wallet. Most importantly, you can manage your funds much easier and use your crypto funds for trading with low fees within the ecosystem provided by the third-party.
Also, there is no risk of losing the private keys, given that access to cryptocurrencies is provided through a personal account. To create it, you may need to share personal details, such as your name, email address, and phone number. With a custodial wallet, you can’t be in the shoes of James Howells. He is the Briton who accidentally threw out his hard drive with the private keys of a wallet holding 7,500 Bitcoin that he mined in 2013. We’re talking about $380 million in today’s prices, so that must be frustrating, right? He recently requested permission to search the garbage dump in the hope of finding the hard drive.
However, custodial wallets have many disadvantages. First of all, you’re not in charge of keeping the crypto funds safe, and this may be a problem, as most exchanges store a good portion of the managed funds using cloud services. In other words, your crypto wallet is online and vulnerable to hacking attacks. Many large crypto exchanges have experienced hacking attacks, including Binance, Coincheck, and Bitrue, Bithumb, and Poloniex, among others. However, the most relevant example is Mt.Gox. The Tokyo-based exchange was the largest one in 2014, but eventually filed for bankruptcy because of a prolonged attack that deprived users of 740,000 Bitcoin.
What is a non-custodial wallet?
A non-custodial crypto wallet lets you keep the related private key and have full control over your crypto funds. With a non-custodial wallet, you are your own bank.
There are several types of non-custodial wallets:
Web and mobile – the private keys of non-custodial web wallets are stored in your browser. Some examples are MyEtherWallet and Guarda.
Desktop wallet – the private keys are stored on the desktop. Some desktop wallets provide backup solutions in case the computer is stolen.
Hardware wallet – these are regarded as the most secure wallets as they store your private keys offline. Hardware wallets look like flash drives. However, they might not be convenient for active trading.
Here are the main aspects of a non-custodial wallet you should be are of:
Third-party involvement – non-custodial wallets let users have total control over their funds as there is no third party involved.
Wallet security – you are responsible for the security of your private keys.
Identity – the overwhelming majority of non-custodial wallets don’t require users to pass through KYC processes if you don’t have to interact with fiat money.
Non-custodial wallet pros and cons
Obviously, the main advantage of non-custodial wallets is that they give you full control over your crypto funds. Also, there is a lower risk of a data breach or hacking attacks. If you care about the security of your cryptocurrencies, you’d be interested to store them in a non-custodial wallet.
One of the main drawbacks is that you have to keep your private key very safe. You are the only one responsible for the safety of your funds.
Why Eidoo Wallet Is the Best Crypto Wallet for You
If you still can’t decide which wallet to choose, you don’t have to go any further. Eidoo is the best non-custodial wallet today because it was designed with the user experience in mind.
Eidoo provides a desktop wallet app, as well as wallet versions for Android and iOS. You can download the Eidoo app to gain access to the Eidoo wallet on-the-go and open up a world of possibilities. Not only does the wallet support multi currencies but you can also enjoy the built-in ERC-20 swap and take advantage of a myriad of DeFi opportunities like yield farming or collecting non-fungible tokens (NFTs).
Furthermore, the wallet can be linked to the eidooCARD, which lets you spend your digital assets online and in Visa-supported merchants across Europe and the UK. Note that accessing the eidooCARD requires some level of KYC.
The Eidoo wallet is the perfect solution to maintaining and controlling your assets independently of a third party and gives you access to so many DeFi opportunities.