How to Differentiate Between Custodial and Non-Custodial Wallets – Key Points to Consider?

What is a Custodial Wallet?

The custodial wallet is a sort of cryptocurrency wallet that is overseen by a third party. In this case, the user loses possession of their private keys and the third party assumes custody of their cryptocurrency. This indicates that the third party is in charge of safeguarding and securing the user’s cryptocurrency.

It’s important to remember that having total control and ownership over your money is the basis of cryptocurrencies. Custodial cryptocurrency wallets, on the other hand, contradict this core principle because they involve giving up control of your money to a third party. The decentralized nature of digital currencies is violated by this, and the investment appeal may be lowered.

It means when you use a custodial wallet, you essentially give another person or organization control over the security of your money. Despite the fact that trustworthy custodial wallet providers are unlikely to steal their customers’ money, there have been cases where customers have been unexpectedly locked out of their wallets, preventing them from accessing their cryptocurrency. Such events, like those that users encounter, cast doubt on the dependability of custody wallets.

Key Features of Custodial Wallets

• Managed by a Third Party

With a custodial wallet, we depend on a service provider to take care of the technical aspects of safeguarding our digital assets.

• Convenience

Custodial wallets are a popular option for newcomers because they are frequently user-friendly and simple to set up.

• Risks and Trust

When using a custodial wallet, you must have faith in the provider to protect your money. If the service is compromised, fails, or places restrictions on your account, you run the risk of losing access to your money.

• Additional Features

Custodial wallets frequently provide extra features including the ability to purchase, sell, and exchange cryptocurrencies directly on the site.

• Personal Information

In order to comply with legislation, custodial wallets can demand users to supply personal information, such as identification.

What are Non-Custodial Wallets?

A non-custodial wallet is a kind of cryptocurrency wallet in which the user has total control over their private keys. This implies that the user is in charge of safeguarding and securing their cryptocurrency.

Non-custodial cryptocurrency wallets provide a number of benefits, but they also have a crucial prerequisite where users need to be familiar with wallet backup and restoration. When using non-custodial wallets, users are also responsible for the security of their cryptocurrency. This suggests that it is necessary to understand how to back up a wallet safely.

Typically, a 12 to 24-word recovery phrase serves as the private key’s representation. Users are required to save this recovery phrase in a safe place. It can be typed into a document on a computer and stored safely on a hard drive in a secure area, or it could be written down on paper and preserved in a safe place.

Key Features of Non-Custodial Wallets

• Self-ownership

With a non-custodial wallet, our private keys, which are essential for managing and accessing our cryptocurrency, are ours alone.

• Security and Accountability

We are accountable for the security of our money because misplacing our private keys could mean that we lose all of our cryptocurrencies forever.

• Decentralization and Privacy

Non-custodial wallets provide greater privacy because we are not required to provide personal information.

• Technical Know-how

When compared to custody-based wallets, non-custodial wallets demand more technical know-how to set up and utilize.

Custodial Vs Non-Custodial Wallet

Well, when it comes to comparison, it is better to go with the pros and cons of both. This will make it easier to compare them side by side and point out the best.

Pros of a Custodial Wallet

There are numerous advantages to going with custodial wallets. Some of the major ones are given here.

• No Transaction Costs

Users can transact their assets free of gas costs using some custodial wallets, like Free Wallet.

• Investment Opportunities

Custodial wallets let you invest in ETFs (Exchange Traded Funds).

• Backup Option

You have the option of backing up your transaction report. You can even reverse any errors in transactions by using this facility. 

Cons of a Custodial Wallet

Although Custodial wallets come with many advantages, it has disadvantages too in the form of

• Less Control

Your transactions are under the supervision of the centralized wallet service provider. Additionally, it has extensive power over your assets. For instance, it can freeze your account, preventing you from freely using the asset.

• Data Breach Threat

Since the wallet is where all of your information, including the private key, is kept. Consequently, any data breach can have serious consequences. In such circumstances, you can even lose everything you own.

Pros of a Non-Custodial Wallet

Non-custodial wallets have numerous advantages over Custodial Wallets like

• Complete Control Over the Assets

Users are in charge of all the assets kept in this wallet. Transactions do not involve any involvement from any 3rd party agencies.

• Security of the Stored Cryptocurrency

Since your private keys, passwords, etc. remain in this wallet, there is less chance of a data breach. 

• Simple Transaction Process

These platforms do not censor the transactions that are made through them. You won’t need to wait for the cryptocurrency exchange company’s verification process to complete transactions.

Cons of a Non-Custodial Wallet

Non-custodial wallets have some disadvantages too as compared to Custodial Wallets. Some of the major ones are as follows

• Challenging User interface 

New users may find it difficult to use this wallet’s user interface. It could take some time to become used to the wallet’s user interface.

• Increased Accountability for Asset Management

You are more responsible for preserving your information, such as private keys and user information, as you are the only one in charge of managing all the assets. If someone obtains these sensitive details, they might be able to steal your cryptocurrency.

How to Select Your Crypto Wallet?

After going through both wallets you must have gained an idea of which wallet to go for as per your specific requirements. To make it easier for you here are a few tips you can follow to select the right wallet 

The most important factors to consider when selecting a cryptocurrency wallet are accessibility & usability, security, and recovery. However, depending on the investor, it could change. Additionally, custodial ones are preferable if you are not a very regular user.

Custodial wallets, according to experts, appear to be the future of cryptocurrency storage and administration due to the convenience of usage, access, and asset recovery.

Custodial wallets are an option for inexperienced investors, according to Moodalagiri of Flippy, because they are easy to use, readily available, offer reliable service in times of need, and make purchasing and selling cryptocurrency assets simple.

On the other hand, you can go with non-custodial wallets if you want to “sign” all of your transactions and interact with blockchain technology, decentralized exchanges, and dApps.

Because institutional investors are becoming more interested in the market, custodian-secured cryptocurrency assets are increasing. On the other hand, if used properly, non-custodial wallets can be quite secure because only you have access to the money.

Undoubtedly, non-custodial wallets offer a greater degree of privacy than custody-based wallets, but Paul from Atato warned that these wallets carry a very high risk because they may even shut you out. Not everyone can handle the security of non-custodial wallets.

Also Read: Top 7+ Blockchain Platforms for Crypto Development in 2023-24

Which is the Best Non-custodial Wallet?

You might be wondering which is the best non-custodial wallet available in the market. Well, when it comes to picking the one it solely relies on you. But to give you a general idea we have prepared a list of the top 3 non-custodial wallets you can go with.

1Best Wallet

Best Wallet comes with a complete ecosystem of Web3 features and capabilities, including trading insights, decentralized exchanges, NFT wallets, and staking possibilities. This is popular non-custodial wallet that enables users to access their private keys. 

In order to protect investor’s funds, the platform also offers two-factor authentication (2FA) and cutting-edge encryption methods. Notably, users can access Web3 ecosystems and transfer funds without having to move between separate applications. 

The Best Wallet app can be used to store all of your cryptocurrency wallets and assets. Best Wallet will soon support additional cryptocurrencies in addition to the Polygon, Ethereum, and BSC mainnet that it is currently connected to.

Moreover, thousands of crypto tokens can be traded with the Best decentralized exchange, which does not demand any registration. Notably, the DEX will provide inexpensive transactions and connect consumers to the best liquidity pools. You can also use the native cryptocurrency, $BEST, to access cheap trades on the DEX. 

Additionally, according to the platform roadmap, the token will shortly include a number of use cases. For instance, a staking function will be included during the fifth phase of the plan. Holders of the $BEST token can benefit from zero-gas trades, unique access to new project launches, and the opportunity to vote on new projects. 

On top of that, power users and platform brand evangelists will receive free $BEST tokens through an airdrop event by the sixth roadmap phase.

NFT capabilities, which let users store all of their NFTs on the Best Wallet and trade fresh NFTs on the ecosystem, are among the additional features that will soon be available. The Best Wallet and DEX will also roll out portfolio management capabilities, market and trading insights, and token analytics to assist traders in making investing decisions.

Pros

• Access to users’ private keys
• Trading and market insights will be provided.
• Best DEX will offer access to the greatest liquidity pools
• $BEST token will offer huge discounts on trading fees
• Wallet capable of NFT

Cons

• As of now compatible with the Polygon, Ethereum, and BSC mainnet only.

2MetaMask

For Ethereum supporters, MetaMask is one of the best cryptocurrency wallets, especially for newcomers wishing to get started with cryptocurrencies, dApps, and NFTs. As long as users are not trying to store coins like Bitcoin, Bitcoin Cash, Litecoin, and other cryptos that are not based on Ethereum or its network, it is often the first choice for newbies who require their first wallet.

This is so because MetaMask only supports Ethereum coins and ERC-20 tokens. While this may seem restrictive, it really covers more than 500,000 cryptocurrencies and tokens on eight different blockchains. Since the wallet is built on the Ethereum network, you can store and trade cryptocurrencies like Polygon, Avalanche, Optimism, Arbitrum, and other well-known coins that compete with Ethereum.

The wallet is the ideal entry point into the world of decentralized apps, which includes DeFi apps and NFTs. It is due to its concentration on Ethereum. As a result, it is frequently cited as one of the best decentralized wallets available.

Pros

• Ideal for ERC-20 tokens and coins based on Ethereum
• Ideal for novices
• A wonderful entryway to dApps and NFTs
• No maintenance fees
• Connects to well-known dApps like OpenSea and Uniswap

Cons

• Only for ERC-20 tokens and coins based on Ethereum
• Sometimes delayed transactions

3Exodus

Exodus is a very well-liked non-custodial wallet that both new and seasoned traders utilize. It is quite secure for a hot wallet, and because the two businesses are in partnership, users seeking even greater security can connect it with a Trezor cold wallet. 

Exodus supports a variety of platforms and comes with desktop software, a mobile app, and even a browser extension. You have the freedom to utilize all of them at once as they all connect to the same wallet, which supports storing more than 300 cryptocurrencies, including the most well-known ones like Ethereum, Bitcoin, Solana, and Binance Coin. 

Exodus is one of the greatest non-custodial wallets for fans of decentralized apps and can serve as your entry point if you are interested in learning more about NFTs and everything else in the Web3 space. It supports important dApps like Raydium and Uniswap. The app also enables trading and swapping and allows you to keep currencies. 

Exodus displays current prices for all of your assets so you can easily monitor how they are performing in the market. It also includes other information and analytics that traders will find useful, such as the best and worst performing assets.

Pros

• Best for novices
• Operates on PC, mobile, and browser
• Solid user feedback
• Buying cryptocurrency has no fees.
• Several staking options
• 300+ main cryptos supported

Cons

• Security is merely basic
• It’s not open source
• Absence of 2FA support

Also Read: How Much Does it Cost to Develop a Crypto Wallet App?

Wrapping Up

Whether it’s a custodial wallet or a non-custodial wallet both are commonly used by crypto users around the world. You can 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. However, you can look for reputable custodial wallet service providers if you are 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 funds.

On top of that, if your only point of concern is to add a wallet to your business offerings, you have landed in the right place. Blocktunix as the best blockchain development company can help you add the best custodial or non-custodial wallet to your business offering.