Cryptocurrency wallets come in different types. But they may be divided into two basic categories: Custodial wallets and Non-custodial wallets.
If you own any cryptocurrencies, you’ve already used a crypto wallet. But a cryptocurrency wallet differs from a regular wallet where you keep your cash. It is a misconception that a user’s bitcoin holdings are stored in a crypto wallet.
Crypto wallets only serve as a platform for users to start cryptocurrency transactions. It also enables them to access their funds on the blockchain.
What is Custodial Wallet
Wallet services provided by a centralised entity, such as a cryptocurrency exchange, are custodial wallets. Custodial wallets provide several advantages, including less user responsibility for private key maintenance. Users who outsource wallet custody to an institution outsource their private keys. The user is not responsible for safeguarding the private key to the wallet and relies on the company to keep the private key secure.
When a user desires to transmit coins from a custodial wallet, they log in with a username and password, and enter the public key of the location to which they intend to send coins. The company is responsible for entering the private key to complete the transaction.
This presents an exceedingly straightforward answer for the customer but also introduces a new level of danger.
What is a Non-Custodial Wallet
Non-custodial wallets are not affected by this issue. Non-custodial wallets do not need the delegation of trust to an institution. Hence no institution may refuse to perform a transaction.
As the user possesses the private key, these transactions are impervious to censorship. However, non-custodial wallets are not as user-friendly as their custodial counterparts. Users of non-custodial wallets must remember that if they lose the private key, the coins in the wallet are effectively gone forever. Losing private keys may be an expensive error. To reap the full advantages of a non-custodial wallet, users must create a set of habits to optimise security and safeguard private keys.
Non-custodial wallets are a terrific approach to guarantee that user assets are not vulnerable to censorship or confiscation; nevertheless, in return for this freedom, the holder of the private keys assumes enormous responsibility.
Differences between Custodial and Non-Custodial Wallets
Controller of The Private Key
Who controls the private key is the most important thing to consider when comparing custodial and non-custodial wallets. A third entity controls the private key in custody wallets. In contrast, the users provide all blockchain custodian services for non-custodial wallets. Create non-Custodial blockchain wallets instead if you wish to launch a wallet that allows consumers to act as their bank (also known as self-custodial wallets)
Transaction Type
Consider the transaction type when comparing custodial and non-custodial crypto wallets. The transaction is immediately reflected as Non-Custodial on the chain. However, this is different with the Custodial wallet.
Security
The sensitive user data for custodial online cryptocurrency wallets are kept in hot and cold storage, frequently breached by data thieves. As a result, custodial security is low unless the authoritative party takes significant security measures.
Contrarily, in comparing non-custodial crypto wallets, users retain full access to the data. This lessens the chance of data theft unless the user discloses the information to a third party or has their device stolen.
Offline Accessibility
You must enter into your Custodial wallet and submit a request to a centralized authority to access your funding and the associated information. Internet connectivity is, therefore, essential.
However, non-custodial wallets do not have this requirement. Consequently, this shows that non-custodial wallets are preferable for utilizing complete real-time blockchain development services.
Backup and Recovery Possibility
Non-custodial crypto wallets fall short of custodial ones regarding backup and recovery options. The Custodial wallets keep the private key. In other words, even if you lose access to data, you can get it back by asking a third party. In the case of non-custodial wallets, where you are the only authority, this is impossible.
Conclusion
With a non-custodial wallet, you have exclusive control over your private keys, which manage your cryptocurrency and prove that the assets belong to you. With a custodial wallet, your private keys are in the custody of a third party. Currently, the majority of custodial wallets are web-based exchange wallets.
An exciting read, right? Follow our blog for future updates.
>>>
For more information, stay connected on our social media pages and ask questions on our discord 👇
Disclaimer: “Non of Oaks articles are financial advice.” The article is strictly for educational purposes only. Oak has no relationship to these projects. The information provided here is no advice, investment, or trading recommendation. We do not take responsibility for any of your decisions. Please make sure to seek professional advice before taking financial risks.
