Custodial vs Non-custodial wallets
Posted on January 13 2021 – By Yada Wallets Team
Last updated on 10 December 2021
When it comes to storing your cryptocurrencies we often hear the terms Custodial and Non-custodial. In this blog, I will explain to you what both mean in simple terms and have a look at why people choose a custodial or a non-custodial wallet.
To understand what a custodial wallet is we first must understand how a cryptocurrency is stored, or rather how to access them. To access someone’s funds on a blockchain network, like for example Bitcoin there is only one way, and that is by being in possession of the private key. The private key is like a big password that shows the network that you are the owner of the funds allocated to the public key that can be generated from that private key.
More simply put, having access to the private key means having access to the funds. When a wallet is classified as a custodial wallet this means that they store and protect the private key for you in a similar way that a bank holds on to your money when you store it with them.
A Non-Custodial wallet is basically the opposite of a custodial wallet, meaning that whereas with a custodial wallet the company behind that wallet has access to your funds, with a Non-Custodial wallet only you have access to the private key and thus the funds. A Non-Custodial wallet is comparable to having cash paper money in your wallet and/or safe.
Custodial Pros and cons
Although custodial wallets are not very popular in crypto culture, they do serve a purpose and can be very useful, especially for newcomers. Here are some of the Pros and cons of using a custodial wallet.
- Because Custodial wallets are in possession of the private keys and thus your funds it leaves you with some ease as you do not have to worry about keeping them safe yourself. Similar to keeping your money with the bank so you are not being bothered to protect it.
- You usually have to pay a fee when making a transaction on a blockchain network. However, the easy thing with custodial wallets is that you can usually send funds to someone else how is with the same custodial without paying a fee as the transaction is not recorded and stored on the blockchain.
- As you do not have to directly store and safeguard the keys yourself. the custodial can make the interface much more user-friendly and less technical. This can be practical for beginners that do not understand how the whole ecosystem works.
No direct ownership
- Meaning that if a custodial got hacked or goes bankrupt, your fund probably goes down with the custodial. Depending on the insurance the custodial has and if it can still continue to operate.
- As with a bank, you will have to go through a KYC process to identify yourself. This is demanded by law in most countries and gives you less privacy.
- Because of the fact that the custodian controls your fund and knows exactly who you are. Governments and/or the custodial can cease your funds or refuse service to you for whatever reason they find legit. In countries where there is a lot of inflation, this happens a lot as the governments of these countries usually do not what you to abandon their hyper-inflated currency.
Non-Custodial Pros and cons
- You are the only one who has access to the fund with a Non-custodial wallet. Making you 100% in control of the funds giving you the freedom to spend whenever, wherever you want.
- Because of the nature of blockchain systems, you do not have to identify yourself. Giving you the possibility to stay anonymous if you want to.
- Because a non-custodial wallet does not need to be connected to any central server but only to the blockchain network of choice, it is online 24/7. Whereas with a custodial wallet it could be possible that the wallet is offline for software updates or any other reason.
- With a non-custodial wallet, you are 100% responsible for the safekeeping of the keys, where you send the funds, and more. This is usually a good thing. But if you do not know what you are doing, and you are making a mistake or lose the private key (or backup) this can cause a permanent loss of funds.
Technical user interface
- Controlling your own keys also comes with the technicalities of them, giving you usually less of a user-friendly interface and requires a bit more technical knowledge of the blockchain system.
- Controlling your own keys also comes with technicalities. Giving you usually less of a user-friendly interface and requires a bit more technical knowledge of the blockchain system.
Whether a custodial or a non-custodial wallet is better for you really depends on your experience with blockchain wallets. The amount of responsibility, and the control you want to have.
If you are new to blockchain wallets. We would recommend you start with a small amount (that you could lose) and test out some wallets that you deem fit for you.
When you’re using a custodial always make sure that you can trust the party that hosts the wallet. Just like you would do with a bank.
We hope that our Custodial vs Non-custodial blog helped you get a better understanding of the crypto space. If you have any Questions regarding Blockchain or Bitcoin? Feel free to ask them on our Facebook or Telegram group. We are happy to help whenever we can!
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