If you want to own cryptocurrencies you need to have a wallet. But what kind of wallet? What is the difference between custodial and non-custodial wallets? And which better suits you?
Not having a crypto wallet in 2022 is like living without a credit card or a Twitter account.
Okay, maybe that’s a bit exaggerated, but you actually can’t enter the crypto world without creating your digital assets wallet.
All the popular crypto exchanges are offering you their wallets. But you also can create a third-party wallet .
You might have heard about hot and cold crypto wallets, but the choice will finally be between custodial and non-custodial wallets.
The words may firstly seem complicated, but actually, it’s easy to sort out the thing right with them.
Hot/cold crypto wallets
Just to remind you, hot wallets are connected to the internet and they store the data about your assets on servers.
Hot wallets are way faster and easier to make transactions, but they can be vulnerable to online attacks, scams, etc.
The cold wallets are typically not connected to the internet, as they store all the assets’ data on hardware.
Accordingly, it may be more secure, but less convenient.
Your cold wallet can exist as a soft on your computer or as any digital storage devices, like a simple USB flash card or HDD.
But still hot wallets are more popular because of crypto exchange users.
It’s worth noting that crypto exchanges can also store the majority of the customers’ funds offline within cold wallets. And they only keep some amount of assets in hot wallets for withdrawals and other operations.
Custodial vs non-custodial crypto wallets
The private keys of custodial wallets are held by a third party.
Vice versa, owners of the non-custodial wallets are responsible for the assets themselves, having full control of the private keys.
Getting more deeply, custodial wallets belong to some centralized businesses such as crypto exchanges. That’s clear because the definition ‘custodial’ means you outsource your wallet custody to a platform, responsible for the private keys.
Unlike non-custodial wallets with a custodial wallet, you are simply logging in to the account with a username and password. Your chosen platform will input the private keys to maintain all the transactions.
Among the most popular custodial wallets are Free Wallet, Binance, BitMex, Bitgo, Blockchain.com, Coinbase, Kraken, Bitfinex, Poloniex, Bittrex, Coinex, Bitstamp, etc.
In non-custodial wallets, you don’t have to outsource your private keys to any platform. So you are not dependent on the serviceability of this platform and you can do transactions by yourself any time you want.
But doing this may be more complicated as you need to keep your private keys safely and input all the transactions data by yourself.
There are non-custodial wallets like Ledger, Abra, MyEtherWallet, Electrum, MyCrypto, Wirex, Button Wallet, Exodus, ZenoGo, Bitcoin.com, Blockchain, BTC.com, Copay, Jaxx, Coinomi, Atomic Wallet, Guarda, Edge, and others.
What are the private keys?
Crypto exchanges’ users may don’t know that, but their platforms are using private keys for signing every transaction and proving ownership of a blockchain address.
Private keys look like huge subsequences of randomly-generated numbers with hundreds of digits. To you they will look like strings of alphanumeric characters.
Any crypto wallet – custodial or non-custodial – holds sets of private keys and your assets can’t be transferred from one address to another without the corresponding private key.
Private keys in crypto are like digital documents that prove your final ownership and control over the cryptocurrency. Losing or compromising your private keys means your assets loss forever.
How to store private keys?
It’s not your problem if you are using custodial wallets but if you are planning to use a non-custodial one – you have to think about it.
As we got previously, private keys have hundreds of digits, so it’s so long it may take years trying to hack one.
A complicated mathematical algorithm uses private keys for generating your public keys for doing transactions. Though it’s impossible to generate a private key from a public key, you have to put your private keys in a very safe place.
Generally, you can store private keys for non-custodial wallets on regular computers, smartphones, USBs, hardware wallets, or even on physical papers.
What storage form to choose depends on your crypto usage regularity. For now, it’s hard to create a safer place for private keys than a well-protected smartphone or personal computer.
Those who are planning to hold crypto for long without regular transactions can keep private keys on offline devices. The safest way is a device that has no connection to internet at all.
So what to choose: custodial or non-custodial wallets?
Speaking about these types of wallets’ pros of cons you should be aware, that any digital data storage can be stolen, lost, or compromised.
Taking into account the biggest crypto platform hacks it is hard to call custodial wallets safe. But actually, it’s the most convenient way for those who want to enter crypto trading.
It’s always possible to start experimenting with small transactions on custodial wallets and then transit your assets to non-custodial.
Some say ‘not your keys, not your crypto’, meaning that only non-custodial wallets can give you full control of your tokens.
At the same time, it can be hard and uncomfortable to maintain safe custodial wallets and their private keys. Moreover, you can’t say for sure that your custodial wallet is safe forever. Especially with the fast-developing new technologies like quantum computing.
So you should make your choice and decide what to do by yourself. As with everything in the crypto world.
Sources: Binance Academy, Medium
