Crypto 101: What’s The Difference Between Custodial And Non-custodial Wallets?

If you’ve ever used Bitcoin or other cryptocurrencies, you know that having a digital wallet is essential. You will need a wallet to make transactions, trade on a cryptocurrency exchange, or use blockchain applications. Therefore, it is necessary to understand how crypto wallets work and the key differences between custodial and non-custodial wallets.

What is a crypto-custodial wallet?

As the name suggests, a crypto-custodial wallet is a place to “keep” your signature. This means that a third party will hold and manage your private keys on your behalf. In other words, you won’t have complete control over your funds – nor the ability to sign transactions. There are also cases where crypto inheritance is not retrievable because the original cryptocurrency owner holds the private keys alone. You can prevent such incidents by sharing access to your assets with a custodian.

Even if you forget your crypto exchange password, you can still access your account and assets by contacting customer support. However, if you use a non-custodial wallet, it is your responsibility to keep your cryptocurrency safe.

What is a non-custodial crypto wallet?

A non-custodial cryptocurrency wallet is a wallet where only the owner owns and controls the private keys. For users who want to be in control of their funds, a non-custodial wallet is the best choice. Since there are no intermediaries, you can trade cryptocurrencies directly from your wallet, and this is a safe option that most traders and investors use. However, it would help to manage your keys and remember the seed phrase. You will need a non-custodial wallet when interacting with a decentralized exchange (DEX) or decentralized application (DApps). Uniswap, SushiSwap, PancakeSwap, and QuickSwa are famous examples of decentralized exchanges that require a non-custodial wallet.

Pros and cons of custodial wallets

The main disadvantage of custodial wallets is that you have to trust your funds and private keys to a third party. Usually, these service providers will also require identity verification (KYC). However, the advantages of a custodial wallet are peace of mind and convenience. You won’t have to worry about losing your private key; you can contact customer support when you have a problem.

When using custodial services, make sure you choose a reliable company that offers insurance and has a high level of coverage. Look for custodians that comply with the regulations.

Pros and cons of non-custodial wallets

The non-custodial wallet offers complete control over your keys and funds without third-party custodians. In other words, your assets are yours, and you can be your bank. Also, non-custodial transactions tend to be faster because you don’t have to wait for withdrawal approval. One downside of using a non-custodial wallet involves accessibility and ease of use. They are generally less user-friendly and cause problems for people new to cryptocurrencies.

Summary

Most crypto users use both, but choosing which wallet to use depends on your needs. If you want complete control over your assets or simply use blockchain technology to interact with DeFi applications, you should consider a non-custodial wallet. However, if you are looking for a service provider that can fulfill your storage needs while you trade or invest, you can look for reliable custodial wallet providers. 

Remember that whether you are using a custodial or non-custodial wallet, you always need to be careful and apply best practices to increase the security of your funds.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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