Difference Between Custodial and Non Custodial Wallet

Difference Between Custodial and Non Custodial Wallet

Cryptocurrency is a term at the peak of its hype. But before you enter the discussion on Blockchain wallets or cryptocurrencies, it is important to learn how to choose the correct wallet for your crypto funds. Cryptocurrency has the potential to become the global currency and hence requires the right storage wallets which can be accessed only with a private key.

The write-up below mentions what does custodial wallet means and what is a noncustodial wallet. Stick to the end of the write-up to find the best possible answer and make the correct choice to store your cryptocurrencies.

What does Custodial Wallet Mean

Custodial wallets are defined as wallets to store cryptocurrency holdings. In this custodial wallet crypto, a third party holds the private keys to have complete control of users’ funds. You are only allowed to grant permission for sending or receiving the payments. These wallets often lessen your responsibility but seek your trust in the custodian holding funds for you.

Some of the examples of best custodial wallets that can be considered to store your cryptocurrency holdings are as follows

  • Free Wallet
  • Bitgo
  • Binance
  • Blockchain.com
  • BitMex

Advantages of Custodial Wallets

  • A major advantage and reason for custodian wallets being a preference for many users is that it does not require any transaction fees. The transactions within the ecosystem are free.
  • As the private key is held by a third party it can be easy to get it back in case the key is lost or you forgot the mnemonic.
  • The managing authority is centralized and holds a backup for your transactions. It is easier for users to restore or undo a transaction.

Disadvantages of Custodian Wallets

  • A major drawback of the custodian wallets is there’s no autonomy of your holding. All the money in these wallets is held by a custodian who can take actions on your funds which includes temporarily freezing the amount stored in it.
  • These wallets require to Know Your Customer (KYC) or an Identity verification to access funds or perform any services related to your funds. This, in turn, impedes the concept behind crypto which is anonymity.
  • These wallets are vulnerable to threats. Although these cannot be easily targeted, still hold the vulnerability facing security breaches.
  • The custodian wallets require the internet to log in and perform transactions on your cryptocurrency holdings.

Also Read: How to Get Bitcoins for Free: Earn Free Bitcoins

What is a Non-Custodial Wallet?

The blockchain wallet grants users the control to be their own bank. Subsequently, only users have the sole control on the private key and there’s no third party involved. This in turn will ensure that your crypto funds are secure. But while using these wallets you must keep in mind to protect all your funds on your own.

Some of the examples of best non custodial wallets that can be considered to store your cryptocurrency holdings are as follows. Go through the list of non custodial wallets and pick the one that fits well within your requirements.

  • Electrum
  • Wasabi
  • Zengo
  • Ledger Nano X
  • Exodus
  • TREZOR One

Advantages of Non Custodial Wallets

  • The major reason behind all the momentum gained by non custodial wallets is these wallets provide complete access of funds to the users.
  • Every detail related to the crypto wallet relies on users which signifies the basic non custodial wallet meaning. The risk of a security breach is comparatively lower.
  • No third-party confirmations are required to perform transactions in the best non custodial crypto wallet. Users can enjoy withdrawals and transactions instantly.

Disadvantages of Non Custodial Wallets

  • Delay in trading can occur in non custodial wallets as the currency will be first sent to the exchange.
  • As you hold your private key it comes with a lot of responsibilities. Minor mistakes can lead to unimaginable consequences and loss of funds.
  • The non custodial wallets have a comparatively tough interface for users.
  • In case of loss of key, you ultimately lose the money. Since there’s no backup loss of mnemonic or your private key there’s no possibility to recover your wallet and funds.

Also Read: Best Free Bitcoin Mining Software (Crypto Mining Software)

Difference Between Custodial and Non Custodial Wallet

Custodial Vs Non Custodial Wallet

Custodial Wallet Non Custodial Wallet
Private Key’s Custodian The Private key is managed by a third party. The services of blockchain custodian are held by the users.
Type of Transaction The transactions in these wallets are not reflected on chain in the real time. The transactions in these wallets are reflected on chain in the real time.
Security The sensitive data of user is stored in the form of hot & cold storage. This data is more prone to hacking. Complete information lies with the users. Risk of loss of data or funds is comparatively lesser as the data stored with the user.
Possibility of Backup & Recovery Since the private key is held by the third party there’s a possibility to recover data as the backup is stored. However, in non custodial wallets you hold the authority and hence recovery of lost data or funds is nearly impossible.
Accessibility Offline Requires connectivity of the internet as the data is stored with a centralized authority. Does not require the internet for full time, which signifies they are better alternative for services of blockchain development in real time.
Future Scope More prone to data breach and security concerns. An edge over the custodial wallets as the users are becoming conscious about privacy and security of their data.

Frequently Asked Questions (FAQs)

Below we have answered some of the frequent queries of the individuals dealing with or willing to deal with different types of crypto wallets.

Ques 1. What is a non custodial wallet?

Ans 1. If you store your cryptocurrency in a non custodial wallet it enables you to control your private keys and own them. These wallets allow complete access to your crypto funds. The provider has no access to your private keys and hence none of your funds can be freed or managed by them in any form.

Ques 2: Are non custodial wallets safe? 

Ans 2.  Yes, the non custodial wallets are completely safe to use and therefore gaining a lot of popularity. The non custodial wallets are considered a safer alternative when compared to the custodial wallets. These wallets enable users to access funds directly and do not require any other third party for managing the funding or performing other related activities.

Also Read: Blockchain Technology

Custodial and Non Custodial Wallets: EXPLAINED

We have explained the advantages and disadvantages of both custodial and non custodial wallets. You can pick the best alternative as per your requirements for your crypto holdings. Some users also prefer using the combination of two. The basic discrimination between the two wallets can be the private key of custodial wallet is held by third-party whereas for non custodial wallet users the key is held by the users.

That’s it from our side. Feel free to ask away your doubts in the comments. Also, for more information and the latest technology guides subscribe to our blog.

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