Differences Between Custodial vs Non-Custodial Wallets

tybdao
6 min readNov 3, 2022

This article will look at the key differences and importance of custodial and non-custodial wallets, as well as the numerous drawbacks of each wallet so that users can make informed decisions about what is the best fit for their specific needs.

Introduction:

As a crypto newcomer, it can be a joyful moment to successfully open one’s first wallet. The wallet serves as proof of entry into the crypto world and makes it possible to easily send and receive crypto assets.

Being used to the hassle of opening bank accounts, the ease of ownership was astounding. The significance of my secret key phrases was also emphasized, as a leak can easily expose one’s funds to hackers.

Everyone who knows about wallets can tell whether we have described the experience of opening a custodial or non-custodial wallet based on the above story.

What are Custodial Wallets

Custodial wallets are also referred to as web wallets or centralized wallets. Custodial Wallets, as the name implies, are wallets that keep custody of users’ private keys. They function similarly to traditional banks in that they receive, send, and store money on the users’ behalf. The funds are kept in vaults with keys that the user does not have direct access to. As a result, the security of funds is solely the responsibility of a third party, not the asset owner.

Advantages of Custodial Wallets

Custodial wallets come with several significant benefits for users.

They include:

1. Ease of use: custodial wallets have easy-to-use interfaces with hints, in-app guides, and tutorials for users. They are built with frontend features that make the use simple and fun.

2. No fees for internal transfers: for transactions within the ecosystem, custodial wallets do not require fees. These transactions are done at no cost to the user.

3. Reduction in transaction errors: custodial wallets constantly use pop-ups and prompts to caution users about pretty risky steps and activities to protect users from transaction errors.

3. Access to customer support and fund recovery: For most transaction errors within the ecosystem, users can often reach out to customer care departments of the wallet to aid their recovery.

4. Fraud detection: for funds sent to a centralized wallet, it’s easy to track the receiving accounts and actions taken to recover or bar those accounts from using disputed funds.

5. Account recovery: Since there are no key phrases, an account loss or password loss can be rectified by customer support so users can regain access to their assets.

Disadvantages of Custodial Wallets

1. KYC required: to use a custodial wallet, users are required to undergo Know Your Customer (KYC) processes that usually require identity cards, personal images, utility bills, etc.

2. Censorship and government control: custodial wallet providers are often registered within country laws and expected to abide by regulations and local laws. They’re often required to cooperate with the government to retain their license and users are easily affected by changes in government policies and regulations.

3. Account can get barred: either due to new policy reviews and government requirements, user accounts can easily get barred from the platform disenfranchising them from accessing their assets.

4. Risk of hack: there have been several cases of hackers targeting and hacking custodial wallets using various methods including social engineering etc. If the vaults of the wallet are accessed, users could lose their funds.

Most Popular Custodial Wallets

The most popular custodial wallets within the cryptocurrency space include:

Binance — Founded by Changpeng Zhao, also known as CZ, a Chinese-Canadian, Binance is the most popular custodial wallet. Binance allows users to easily migrate funds between Binance chain wallet accounts. Binance only allows trading of selected tokens it periodically lists.

FreeWallet — Was founded by Alvin Hagg, and was one of the earliest mobile-first wallets for crypto assets with a built-in exchange. FreeWallet makes access to users’ crypto assets easy using its web interface.

Non-Custodial Wallets Explained

Non-custodial wallets are crypto wallets that allow users to keep their private keys private. Non-custodial wallets, as the name implies, do not keep custody of users’ crypto assets and instead serve as a user-friendly interface for interacting with various blockchains. When the wallet is opened, the user is usually given a set of mnemonic key phrases that serve as access to the wallet.

Advantages of Non-Custodial Wallets

1. No KYC required: non-custodial wallets do not require KYC so creating a non-custodial wallet is seamless and easy.

2. A lower risk of hacking: non-custodial wallets have a lower risk of hacking. To access them, the private key of users must be compromised as non-custodial wallets do not keep users’ private keys on their server.

3. Zero censorship and control by the centralized government: non-custodial wallets cannot be controlled or accessed by central governments or their policies as the wallet provider has no direct access to users’ funds.

Disadvantages of Non-Custodial Wallets

1. Risk of loss of funds due to transaction errors: in the event of a transaction error, non-custodial wallet users can lose their funds forever so they’re best for experienced users who know the inner workings of cryptocurrency transactions.

2. Loss of account: If the key phrase is lost, the wallet is lost. no third party can support the recovery process so users need to keep their key phrases safe.

Most Popular Non-Custodial Wallets

1. Coinbase Wallet: although Coinbase exchange is custodial, the wallet is non-custodial and requires no KYC to use. Coinbase wallet is a great option for crypto beginners as it has a welcoming and easy-to-navigate interface. The wallet connects to a lot of banks so users can easily purchase crypto via their bank account balance. The wallet supports over a hundred thousand digital tokens and non-fungible tokens (NFTs).

2. Electrum: Electrum is one of the earliest crypto wallets and it is currently the best Bitcoin wallet with extensive security features and a customizable interface.

3. MetaMask wallet: was developed by Aaron Davis and Dan Finlay in 2016. Metamask users can effectively connect with several blockchains using MetaMask without downloading the whole blockchain. It stands out for its ease of use, availability of desktop and mobile versions, ability to transfer, receive, and buy cryptocurrencies straight from the wallet, and ability to hold non-fungible tokens (NFTs).

4. Phantom: Phantom is a non-custodial wallet built on the Solana blockchain. It provides users with private keys that are encrypted, allowing for self-custody of ones crypto asset. Phantom is fully compatible with every cryptocurrency created on the Solana blockchain.

What Works For You?

At the end of the day, different wallets have their drawbacks and every user has their preference so before you get started, you need to make an informed decision and choose what works best for you.

If you’re looking to explore a unique blockchain, then it will require using a wallet that is best suited for it.

For example, Pontem Wallet is the first and one of the most popular cryptocurrency wallets for Aptos.

Aptos is a blockchain that prides itself on its speed and scalability and uses Move, which is a unique smart contract language. Aptos can process 100,000 transactions per second (TPS) and confirms transactions in less than a second. Pontem Wallet was built by Pontem Network, which is the first dApp studio focused on the Aptos blockchain.

For more updates, follow Pontem Network on all social: Website, Twitter, Telegram, GitHub, and Discord.

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