The custodial and non-custodial wallets are the two forms of cryptocurrency wallets that every crypto trader must have interacted with in the past even without realizing it. For instance, it is impossible to purchase crypto from any crypto exchange without using the exchange wallet which is in itself a custodial wallet. Next, trying to safeguard the purchased crypto by storing them in a different wallet outside the exchange is already a way of dealing with a non-custodial. While the custodial wallet is owned by the exchange and issued to the trader for interacting on their platforms, the non-custodial wallet is completely owned and controlled by the individual for safeguarding his digital assets. This work will therefore help you understand in detail the major difference between custodial wallets and non-custodial wallets. This will assist you in taking decisions on which wallet is best for storing your digital assets today.
What is a Custodial Wallet?
A custodial wallet refers to those wallets where a third party has control over your private keys. Owners are only allowed to create their username and password for assessing the wallet online. A good example of custodial wallets are exchange wallets like: eToro wallet or Binance wallet.
Here, the exchange issues their wallets to all users for buying and selling cryptocurrency on their platforms. The private keys of these wallets are safeguarded by the exchange.
The only access the users have to this custodial wallet is their password and registered email or phone number. Losing this information could deprive the owner of accessing his wallets again.
Using a custodial wallet means the users trust the exchange. Hence, they can commit their assets to them to secure on their behalf. However, it is important to point out that the owners also stand the chance of losing their assets in cases where the exchange is attacked or hacked.
Advantages of a custodial wallet
- Very easy to obtain at zero cost
- Can be accessed anywhere using one’s mobile phone.
- The wallet is safeguarded by a third party
Disadvantages of a custodial wallet
- Users are given only a password while the private keys are held by the exchange.
- They are prone to attacks and hacking
- Commissions are charged for using custodial wallets.
What is a non-custodial wallet?
The non-custodial wallet is a crypto storage wallet that offers users total control over their wallets and private keys. Here the private keys are known only to the owner which he tries to safeguard and conceal from any other party. The non-custodial wallet is more secure than the custodial wallet and can function with or without the internet. Thus, the non-custodial wallet could come in the form of hardware devices functioning offline only or they could be web-based needing the internet to function.
However, the most secure form of the non-custodial wallet is the hardware Wallet which does not require the internet to function and therefore is difficult to attack or hack. Here the hardware Wallet can easily be switched off when not in use, which makes it the safest storage wallet for cryptocurrency.
Major differences between Custodial and non-custodial wallets
| Custodial wallets | Non-custodial wallets |
| The private key is held by a third party | The private key is held by the individual |
| Always require the internet to function | Can function both online and offline |
| Do not give owners total control over their assets | Gives owners full control over their assets |
| A third party is responsible for safeguarding the wallets | The individual is solely responsible for safeguarding the wallets |
| The storage platform is usually centralized | Usually decentralized |
