Custodial VS Non-Custodial Wallets

Custodial VS Non-Custodial Wallets

A wallet is known for keeping cash and cards but with a crypto wallet, do you also keep crypto cash there or cards? Probably No, at least not yet. A crypto wallet can be an application, software, or device programmed to give the service of a wallet for keeping the private and public keys of our Cryptocurrencies. For better understanding, according to Wikipedia, “a cryptocurrency wallet is a device, physical medium, program, or service which stores the public and private keys for cryptocurrency transactions.”

Crypto wallets keep your passkeys, which is used for signing in and making transactions. Instead of holding the passkeys or writing them down, the wallet keeps them for you and makes them accessible to you anytime you need them by rendering the interface and letting you access your crypto. With the modern crypto wallet, anybody can access the Blockchain through their wallet because sending crypto out requires manual tasks that the modern wallet has simplified everything into.

Satoshi Nakamoto was the one to build the first ever crypto wallet in February 2009, which was tested with Hal Finney. He received a total of 10 bitcoins from Satoshi, which was the first digital bitcoin transaction in history. And that makes Satoshi’s wallet to be the first crypto wallet ever.

How Crypto Wallets work

Crypto wallets are used for keeping passkeys: public and private keys — the password that gives you access to your Cryptocurrencies and lets you transact them — unlike your regular wallet, where you keep your cash. It allows you to send and receive digital coins or assets like Bitcoin, Ethereum, etc. The wallet made it easy to use your crypto as it’s easy to use your credit card for shopping.

Technically, the wallet doesn’t store your Cryptocurrencies, but they all live on the Blockchain. All your holdings are not in the wallet but on the Blockchain, which can only be accessed using the unique private key of the crypto wallet. The Private key proves your ownership of the digital assets, and without it, you can’t transact your crypto. And if you lose the key, you won’t be able to access the wallets. Blockchain is immutable; that’s why it’s essential to keep the keys in your digital crypto wallets, where you can access it anytime.

With your wallet, you can interact with Blockchain, allowing you to transact, purchase and monitor your digital assets. Sending and receiving Cryptocurrency and other digital assets e.g., NFTs has been made easy with the wallet using different integrated methods. You can send by entering the recipient’s or receiver’s wallet address (the public keys/address) — this includes strings of letters and numbers to which cryptocurrencies or digital assets can be sent— then choose the quantity or amount of crypto you want to send, confirm the transaction using your passkey then send it.

With modern growth, many wallet applications have integrated a QR codes scanner, a system that lets you scan a receiver’s QR code, confirm the transaction with your key and then send it quickly. If you’re the receiver, it’s even easier than sending your wallet address to your sender to receive the payment.

Types of Crypto Wallets:

There are quite various types and models of crypto wallets. These are the most common type presently, but you may also encounter others, but they’re rare:

Software Wallets

This is the most used wallet now; these wallets include applications for both mobile and desktop devices. These software applications are programmed to be installed on desktops, or mobiles, which can connect to the internet and access the blockchain network. Using a software-based application, you can transact, check your balance and operate your Cryptocurrency normally.

And from the global statistics so far, most people prefer mobile for everything because of its handiness, and with that, mobile-based applications are the most used software wallets. And it has made it easy for users to transact and enjoy some special integrated features. Like scanning QR codes to make shopping payments using crypto through their NFC (near-field communication). And mobile software wallets are available for both android and IOS users.

Hardware Wallets

Hardware wallets are physical handy wallets, unlike the software wallet. Using a hardware wallet, you store your passkeys in a storage hardware-specified-based device. This wallet resembles a USB drive, Hard drive, or Modem drive but with the specialty of cryptocurrency wallet feature.

When you want to make a transaction using a hardware wallet, you plug in the hardware wallet to the device; after sign-in, you can make a transaction through it even without entering your passkey to verify; most of the time, it automatically detects it without requiring you to enter it repeatedly upon every transaction.

Getting a hardware wallet is costly, unlike a software wallet which is sometimes less or free but getting a hardware wallet is better than $150 – $250. So, this means you have access to your hardware wallet only when plugged in.

For under 100$ you can grab your Ledger Nano S (one of the best hardware crypto wallets in our opinion)

Paper Wallets

This is among the old types of regarded wallets for crypto. Since crypto wallets are used for keeping your passkeys, users then use paper wallets to keep their passkeys written or typed down on paper so that they won’t forget. This paper wallet is risky because of loss, damage, and security, so many crypto users, don’t make use of it.

Although there’s nothing wrong with using it because some people still use it as their wallets, they even print out their QR codes on paper for mobile users to scan. If users can take a good measure of securing it, they can use it preferably because they love it.

Public keys and Private keys

These keys are also known as passkeys. These keys are created or generated to secure your crypto and, generally, your assets on the Blockchain.

What are Private Keys?

The private keys, also known as secret keys, are mainly generated through cryptography to encrypt and decrypt data. This key is shared by the wallet generator to the authorized parties- the owner of the wallet. Private keys represent absolute control and ownership of cryptocurrency

When this key is generated for a user, it consists of long, random and non-guessable bits with hundreds of digits. For simplicity, they are usually represented as strings of alphanumeric characters. Private Keys can take a few different forms. In ordinary, base ten notation, a private key would be hundreds of digits long-so long that it would take years to crack a private key by brute force.

Brute force is the only method an attacker can use to have access to a wallet’s private key. Attackers will try out several keys until they find the appropriate one that fits yours. It is vitally important to prevent one’s private keys from being lost or compromised.

Best Way to Store Private Keys

Private Keys can be stored on computers or mobile phones, USB drives, a specialized hardware wallet, or even a piece of paper. The ideal form of storage for Private Keys depends on how often you intend to use your crypto wallets.

If you are using your crypto wallets consistently, it is advisable to store them in a well-secured convenient place e.g., a password-protected mobile phone or computer. However, for long-term use, private keys should be stored in cold storage or offline- ideally 

What are Public Keys?

The public key is extracted or created through the private key. The mechanism behind the public key is built to match a unique private key. And together with the use of private keys cryptography, they’re used in decrypting and encrypting messages or information in a transaction. However, it’s nearly impossible to generate a private key from a public key. 

The public key can be public by generating an address that can be known to others. These keys are generated from the Blockchain using a mathematical problem solving known as one-way functions so that it can generate the keys in pairs. Think of the address generated from the public key as a mailbox, and the private key as the key to the box.

These keys work in a way that the public is meant for any sender to encrypt a message in it through the intended public key of the receiver, which then can only be decoded using the matching or associated private key of the receiver. So, when a sender sends a crypto fund to a receiver encrypted, the sender’s public key aligns with the intended receiver’s public key. The sender’s encryption can only then be decrypted using the associated receiver’s private key to make the fund accessible to the receiver. After the successful transaction, it will reflect on the blockchain record or ledger, decreasing the sender’s balance and increasing the receiver’s balance.

NOTE: Don’t ever share your private key with anyone, even a close relative, either on-demand or on a proven view of it. Because once your private key is exposed, you’re vulnerable to being changed over on the ownership of your digital assets because the private key is the one that gives you the ability of ownership and also grants you to transact your cryptos.

“Not your key, not your coin,”: Explained

The idea of this world’s most famous crypto mantras is that- if your crypto is stored on the Blockchain and is accessible through your private key only making it one-person ownership.

The phrase “Not your key, not your coins” refers to needing the owner’s private key to access funds or coins associated with the key. We can say the reasons for keeping your crypto funds and coins in your wallet, which is technically wrong, is straightforward enough. 

Cryptocurrency was created to decentralize ownership, not to centralize it, because using a third-party wallet to keep your coins means you’re keeping in with the third party. NO! That’s technically wrong. Instead, it’s just a wallet used to keep your keys with unique accessibility.

Because in some crypto exchanges which involve you keeping your coin to a trusted third party has seen quite several attacks, which makes your assets vulnerable to threat. The exchange system involves using a third party for crypto storage, is less in your control because of the centralization, and even at a significant security risk.

The holder or the owner of the private keys decides the flow of the coins associated with the key and holding this key as the owner makes it your responsibility to guide it from exposure at all costs. Once your coins are not on the Blockchain or in a centralized system due to the usage, be conscious of threats anytime.

Custodial VS Non-Custodial Wallets

What is a non-custodial wallet?

Non-custodial wallet refers to the type of wallet where only you, the holder, have total control of the keys. Non-custodial are built upon intermediaries-free structures to enhance the decentralization of Blockchain. A non-custodial wallet enhances a more decentralized control of your assets, which means the ownership is in yours, not in centralized custody.

With non-custodial wallets, you can transact crypto directly from the wallet without any third-party interference. Many crypto owners, holders, and traders love using it because of its decentralization, total maintenance and ownership control of your keys and seed phrases.

Advantages of Non-custodial wallets

  • Total ownership control

The main flag held by this wallet that makes it gain attention is decentralization- complete user control over their funds. The users need not worry about using any third-party product to manage and control their funds.

  • Safety

Unlike a centralized one, to breach a decentralized system is challenging. Since the private keys are in only your control and hackers and thefts have no means of assessing the private keys, your wallets will be forever safe. However, with centralized wallets (custodial wallets), the private keys are stored by both the owner and the controlling body making it so much easier for intruders to hack the company’s safe to get access to your wallets resulting in losing your funds.  The adoption of non-custodial wallets in the blockchain space has reduced the incidences of hacks, breaches and thefts of assets and given more room for innovations around the system.

  • Fast or instant withdrawal

With a non-custodial wallet, it does not need any confirmation from anybody or any third party before performing transactions or withdrawing funds. The system has made it easier to enjoy an instant withdrawal with less or no delay.

Disadvantages of Non-custodial Wallets

  • Full responsibility

Though this might not sound like a disadvantage, might be perspective to different users. Being accountable for the entire security of a wallet is a big task for users. Even the slightest mistake, incident, or unguarded lead might lead to deletion, robbery, and many unforeseen consequences around the wallet.

  • Not user-friendly

A total beginner will definitely not be able to navigate through the interface. Most of these wallets interfaces way too challenging to understand with less technical knowledge.

  • Trade delay

The wallet is unsuitable for exchange or trading; they cause delays so that currencies can’t be traded quickly. However, this also seems to be why some interested users go for it. In a non-custodial wallet, any transaction made will reflect on the Blockchain instantly. The wallet is connected directly to the blockchain network.

  • Loss of keys/ recovery phrase, loss of funds and assets

When any user loses access to the wallet by forgetting the sign-in requirements or the recovery phrase will lead to a total loss of all the funds associated with the wallet. Blockchain analysis reports suggest that over 3 million BTC might be lost forever due to the loss of private keys and sign-in details. That’s why it’s advisable to permanently secure the recovery phrase as secure as the private keys.

Examples of Non-custodial wallets

Some examples of popular non-custodial wallets:

What is a Custodial Wallet?

A custodial wallet contrast to non-custodial wallet; involves third-party control. As the name implies “Custodial Wallet,” the wallet is in the controlling body’s custody, and authority is all on them- the wallets are centralized and controlled by a central body. The controlling entity manages, holds, and have access to your private keys and can be used on your behalf because it has the control.

Summarily, users don’t have complete control over their funds and digital assets in the custodial wallets, because it’s been managed, secured, and controlled by an entrusted third party. Using a Custodial Wallet is more or less risky but also has some unique benefits.

Advantages of Custodial Wallets

  • Losing keys has no significant effect

The third party manages the keys, funds and digital assets available in the wallet. Losing the recovery phrase or passkeys is easier to regain or retrieve. Unlike the non-custodial wallet, which is a total loss.

  • Free and Fast transaction

This wallet does not require a transaction fee before a transaction can be successful; unlike other wallets, this system enables every single customer to make free transactions within their ecosystem. It has helped many users save more because of the uncharged fee for transactions.

  • Possibility of backup is high

The third party managing the wallet often offers a backup system in case of an unforeseen circumstances. Users can easily undo a transaction in process or restore a mistakenly previously done transaction. It has considered forgetting as human nature and provides backup as a solution.

Disadvantages of Custodial Wallets

  • Control over your funds

As it is known that the system is centralized, there is no total control over your assets. And this has been among their most significant disadvantages. They have complete control over the flow of your funds and any required process. The managing body can do and undo anything with your assets.

  • Less Secured

For the past years of existence, threat, breach, and attacks has been occurring around custodial wallets and has exposed many vulnerabilities in them. Custodial wallets are vulnerable to attacks with one of such incidents recorded with the Japanese exchange, Mt Gox in 2014 where over 70% of the bitcoin transactions were hacked leading to a $450M loss.

  • Need for KYC

Custodial wallet has been set to strictly recommend users to always perform KYC (Know Your Customer, ID Verification) before any transaction grant. Users cannot access their funds or related services unless their identity is provided. And so, the necessity for identity verification has impeded the core and fundamental principle of Cryptocurrency and Blockchain- Autonomous.

Examples of Custodial Wallets

Some examples of popular Custodial wallets:

  • Bitgo
  • BitMex
  • Binance
  • Free Wallet
  • etc.

Which wallet is best for you?

From all the information provided above, if you’re looking for a wallet that has a decentralized system in which you can have complete control of your wallet, then a non-custodial wallet is the best for you. But if you are looking for a beginner-friendly and centralized wallet with incomplete control of your funds and information, then a custodial wallet will be the best.

How to set up a Digital Wallet

Step 1: Download the wallet app from your play store, Apple store, or any verified website for your desktop and mobile software wallet.

Step 2: Create your account. 

Note: With a Custodial Wallet, there might be more demand for personal information due to their KYC policy. But in a non-custodial wallet, you don’t need that, not even an email address.

Also, make sure to keep your recovery phrase somewhere secure and also your passkeys. The recovery phrases are randomly selected 12-word phrases. Make sure it’s secured and kept well for future need for recovery.

Step 3: Start making instant transactions; you can send and receive Cryptocurrency into your wallet. Receive transactions by sending out your wallet address to the sender.

Note: For a non-custodial wallet; it’s always not possible to buy crypto with your local currency, be it US dollars, pounds or Euros. You will find a way to exchange your currency for crypto and then transfer it to your wallet.


The primary distinction between a Custodial and Non-custodial wallet is that in custodial, the private key is held, controlled, and secured by a third party. In contrast, in non-custodial, users are fully responsible for and in control of their assets.

Deciding between a custodial and non-custodial wallet is crucial when securing your cryptocurrency holdings. Some people prefer custodial exchange accounts, others prefer non-custodial wallets, and some use a mix of the two due to various reasons. 

However, the most important choice should be based on the security of your assets and funds. Always adhere to best security practices if you want to spread your cryptocurrency holdings across multiple crypto wallets or whatever you choose.

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