What are the differences between non-custodial crypto wallets and crypto custodians? As for the crypto wallets, there are the simple non-custodial crypto wallets as you know and then there are the third-party crypto custodians to choose from.
However, both come with their characteristic pros and cons and therefore it is required to know the differences between the two before making the choice.
This article will help you a lot in making your choice since at the end of it you will be knowledgeable about the differences and significance of both.
There is an ongoing debate on how best to store the crypto assets and people are confused as to which type of wallet they should choose.
People want to have custody of their private keys and more control over their crypto assets and therefore are often in a dilemma while choosing between a custodial and a non-custodial crypto wallet.
A custodian or a custodial wallet is where the private keys are with the third party. This means that the third party will have total control over your assets and funds.
However, they cannot send, receive or use them without your permission. On the other hand, the non-custodial wallets or crypto wallets in simple terms are actually a kind of blockchain wallet.
This acts just like your own bank. You will have full control over your funds as well as the private key related to the wallet.
- 8 Differences Between Non-Custodial Crypto Wallets and Crypto Custodians
- Which is Better to Use – Non-Custodial Crypto Wallets and Crypto Custodians?
8 Differences Between Non-Custodial Crypto Wallets and Crypto Custodians
These wallets are one of the latest innovations of the crypto ecosystem which paves the path for investments of institutional capital into the crypto industry.
A non-custodial wallet, on the other hand, is a decentralized wallet where the holder gets a file with the private keys. Check out Differences Between Crypto Selling and Withdrawing.
These are needed to be written down in a mnemonic phrase and to use them to restore the funds. However, it comes with a lot of responsibility for your funds as well as the keys that you hold.
In fact, the crypto custodians strive to offer convenience and security to their users while storing their crypto coins with their customer-friendly solutions.
There are few features that are exclusive to these types of wallets that may give a specific advantage over the standard crypto wallets.
However, there are lots of other aspects and differences to know about the two to make the right choice in the end. Here they are.
1. Custody of Private Key
The most significant difference between the two, as said earlier, is in the custody of the private key. In the case of custodial crypto wallets, this private key is with the third party and they are responsible to manage it.
Apart from that, the custodial wallet providers require the users to enter an alphanumeric code which is quite long and very confusing in order to create the private key with which the users can access the wallet.
In comparison, in the case of a non-custodial crypto wallet, everything related to the custodian services provided by the blockchain typically resides with the users. Additionally, these wallets have a pretty similar alphanumeric code which is called the public key that is used to receive funds.
2. Transaction Type
On the other hand, this is not so in the case of the custodial crypto wallets, which, typically, pulls it back a bit in terms of security and anonymity.
3. The Security Aspect
In the case of the custodians, since the private keys as well as all of the sensitive data and information are stored in hot or cold storage, there is a high chance of it being hacked by the data intruders and malicious actors.
In most of the cases, the security features and systems in place in these wallets are quite weak in comparison to the non-custodial crypto wallets, though all are not created equal.
Whereas, in comparison, the non-custodial crypto wallets are free from such vulnerabilities since the entire information as well as the private keys remain with the users themselves.
In the case of the custodial crypto wallets, users are granted accessibility only when they log into their accounts. It is only then the users can make a request to the central governing authority to access their funds as well as the information corresponding to it, everything happening online. This means that without the internet you cannot gain access to your wallet.
On the other hand, there are no such requirements for the non-custodial crypto wallets. You can access it anytime you want and need to. This, in turn, means that through these non-custodial wallets you can enjoy real-time services, which is a significant benefit offered by it.
5. Backup and Recovery
When it comes to creating a backup, you can do so when you use a non-custodial wallet but in case you lose the wallet and thereby the private keys, which is your sole responsibility, you cannot recover it easily, if at all.
In comparison, the custodial wallet solutions have a slight edge over the non-custodial solution in this aspect since the private keys are held by a third party. In case you lose access to your data, you can easily make a request to the third party and regain access to it. Your data will never be lost.
6. Future Scope
As crypto adoption rises and more and more people get involved in it and are aware of the market trends and news, the use of non-custodial crypto wallets will rise significantly. This is because they will be more concerned about data security and privacy.
On the other hand, the use of custodial crypto wallets will be comparatively low than the non-custodial crypto wallets due to the fact that there has been a rising number of instances of data breaches, hacks and other issues that have raised concerns among the crypto users.
However, both are good enough to coexist, of course, with some amendments made in the custodial wallet design and performance.
There are lots of non-custodial wallets available in the market today and more of them are being added to the list with each passing day. This is due to the advantages that these wallets provide over the custodial wallets.
Some of its significant benefits are providing individual access and control over the funds to the users, more safety and lower risks of a data breach, and allowing instant withdrawals since there is no need for an approval from the third party. All these in fact streamline the entire process.
On the other hand, the advantages of the custodial wallets include allowing more cost-effective transactions since there are no transactions fees charged in this ecosystem, losing the private key is not a big issue here since access can be regained easily, and offering backup facilities as well as allowing the user to undo or restore a prior version much easily.
Both custodial as well as non-custodial wallets also come with some significant disadvantages. As for the custodial wallet, the major disadvantages are third-party control of the private keys as well as the funds and management of the same which involves fund transfer as well as the freezing of the amount stored in the wallet.
There is also a significant threat of data breach and hacking of the account since the security measures are vulnerable. Also, the need for KYC or Know Your Customer as well as the ID verification requirement by these specific types of wallets will not allow access to the funds or any other related services without proving the identity of the user. This requirement actually impedes the fundamental principle of cryptocurrency which is anonymity.
In comparison, the downsides of the non-custodial wallets are that it will not allow the users to trade quickly because they will be needed to send it to the exchange first.
The responsibility for the security of the keys is on the users themselves and therefore even the smallest of errors may result in deletion of the files, theft and other unexpected consequences.
The user interface of these wallets is also not very user friendly as the user interface of the custodial wallets. And, in case of loss of the private key there is no chance of regaining it.
Which is Better to Use – Non-Custodial Crypto Wallets and Crypto Custodians?
In order to determine which among the custodial and non-custodial wallets is better, you will need to consider your preferences and how you want to store your crypto coins.
It is true that, in spite of the fact that the custodial wallets offer a good user interface, their number will gradually decrease in the future because the users typically want to have more control over their crypto wallets.
However, this does not mean that the custodial wallets are on the verge of going into oblivion.
However, most of the people will favor the non-custodial wallet. The simple reason behind this is that this is typically a crypto wallet that is based on the blockchain and therefore is more secure than the custodial wallets.
In addition to the merits of the non-custodial wallets mentioned above in terms of control and access, these wallets also offer two different types of private keys to users who can use them to make a transaction.
One of them is the mnemonic seed. This is typically a 12-24 word value. This value is created in order to encapsulate the genuine private key.
This private key is stored on the computers of the users and gives them the opportunity to access several different accounts simultaneously.
The other one is the raw private key. This is actually the free-form private key. It is an alphanumeric string and is also stored in the computer of the users.
On the other hand, the crypto custodian or custodial wallets are preferred by those users who find that remembering the long alphanumeric string and complex combination of the private key is a bit too much for them.
They are happy to leave them with a third party to conduct transactions and do not need to worry about losing them and losing access to their accounts as well.
Yes, in the case of the non-custodial crypto wallets, whether it is a hard disk or a paper, there is always a risk of losing it physically.
This will mean losing all your money since there is very little or no chance of a recovery.
However, the fact that it does not need online connectivity makes it more convenient for them.
Still, if you look at it closely, the fact that these keys can be lost poses a significant risk to the institutional investors who hold a large number of crypto coins.
The crypto custodians will also continue to exist in the crypto scene due to another significant reason, which is the regulation according to the SEC.
The Securities and Exchange Commission has published a regulation as a part of the Dodd Frank Act that those institutional investors who have more than $150,000 worth of assets of the customers need to store their assets with a qualified custodian.
The definition also includes the futures commission merchants and foreign financial institutions.
With fewer banks allowing the facility of storing crypto coins, people will turn towards the custodial wallets inevitably.
With this regulation, the future of the custodial wallets of cryptocurrencies looks bright and their popularity has also grown significantly in the past few years.
Most of the market critics, institutional investors and analysts view these custodians as the bridge between the ever shifting crypto space and the conventional institutional investment markets.
With respect to these latest status, there are at least two developments expected in the future of the crypto custodian solution.
The first, and probably the most significant one is the entry of the big players that will have a serious impact on this market, which is still in its nascent stage.
This move has certainly started and several notable companies have started to design crypto custody services to offer a much better experience to the users.
The other significant development required is in the clarity of the regulations.
According to the current regulation, there is no provision for security related to crypto storage and whatever there is, businesses do not have a clear and perfect understanding of it themselves.
This needs to be looked into seriously so that industries can evolve in the true sense and play confidently in an even field.
However, with more and more people showing their interest in cryptocurrencies and the market growing rapidly, the safety and security aspect of the crypto custodians will be improved for sure in the coming days.
Some of them have already started to implement better and more effective safety and security measures to prevent hacking which includes and are not limited to:
- Two factor authentication or 2FA that will prevent the hacker from getting easy access to the account by using a separate device
- Setting up a pin code that will protect the crypto coins from the hackers and data intruders
- Need for multi signature confirmations that will send verification messages to different registered emails and a fund will only be released after receiving confirmations from all of them and
- Imposing transaction limits so that one cannot withdraw all the money at once.
In addition to that, a major part of the funds is stored now in an offline cold wallet which makes it nearly impossible for a hacker to access and steal them.
The good thing about the non-custodial wallets however is that there are a lot of different types of such wallets available to use and to store your private keys in an encrypted form. These are:
- Hardware wallets which are physical devices that look pretty much like a flash drive
- Mobile wallets and web-based wallets that can be accessed using a private key login from any device and
- Desktop wallets that reside on your desktop.
Considering all the above facts and factors, it can be said like earlier, choosing between a crypto wallet and a custodial wallet boils down to how exactly you want to store your crypto coins.
You may even choose a combination of custodial as well as a non-custodial wallet to store your crypto coins safely.
However, consider whether or not you want a hot or a cold wallet to make your decision as well as whether you want to spread your crypto holdings between several crypto wallets for that matter.
Finally, irrespective of whichever option you choose, just make sure that you always follow the best security practices to have a complete peace of mind.
It is a fact that both custodial and non-custodial crypto wallets will co-exist in the crypto sphere but the non-custodial crypto wallets will have more prominence. Knowing the differences between the two will let you know the reasons behind it.