Custodial vs. Non-custodial wallet overview

Custodial and non-custodial wallet comparison

In light of the growing adoption of cryptocurrencies, it’s critical to develop solutions that will help blockchain technology become more widely used. Today, eWallets are the most commonly used applications for cryptocurrency holders: digital assets are stored, managed, and used via crypto wallets.

Bitcoin wallets are classified into two types: custodial wallets and non-custodial wallets.
It’s all the rage in the cryptocurrency world to discuss which wallet to use for your cryptocurrency and to compare custodial and non-custodial wallets. Let’s take a deeper look at both custodial and non-custodial wallets to determine their relative advantages and disadvantages. You’ll learn about the similarities and differences between the two types of wallets in this article, as well as whether one is deemed the superior option.

What is a custodial wallet?

A custodial wallet is one in which a third party manages the private keys. Therefore, the third party has complete control over your funds, and all you have to do is authorize payments to be sent and received.

What is a non-custodial wallet?

A non-custodial wallet allows the wallet holder to access all of the funds in the wallet, and the user is the only one who has access to the private key.

Difference between non-custodial and custodial wallet

As stated before, the term “custodial wallet” refers to a type of digital wallet that holds a user’s private keys while also providing backup and security for their assets. Therefore, custodial keep users’ private keys. Custodians seek to make crypto storage as convenient as possible for users — some users choose safe and user-friendly solutions that allow them to have instant access to their assets. Additionally, users of custodial wallets can recover their accounts by requesting information from a third-party service provider.

A non-custodial wallet is a kind of decentralized wallet in which the customer retains ownership of their private keys. The user receives a file containing private keys and is prompted to write down a mnemonic phrase that will enable them to reclaim their funds. You have total control over your funds if you have private keys. Besides, these keys also can be applied to other non-custodial applications. It’s important to remember, though, that having entire control over your money also means you are solely responsible for it.

Besides this, there are a few features that are unique to both types of wallets that may offer them a competitive edge over each other.

Pros & Cons of Custodial Wallets

Pros

• Easy to navigate interface
• All (or most) assets in one place
• Borrowing, staking, or loaning assets available
• Lower fees for some operations (e.g. exchange, transfer, trading)

Cons

• Wallet is controlled by a 3d party
• Susceptible to hacks
• Possibility of exit scams
• Lack of anonymity (due to 3rd party risk)
• User registration and KYC/IML is needed

Therefore, when it comes to passing up your assets, there are several factors to consider. Having established some background information on custodial cryptocurrency wallets, we will now go on to a more in-depth discussion of non-custodial cryptocurrency wallets.

Pros & Cons of Non-Custodial Wallets

Pros

• The owner has complete control over the wallet
• Instant depositing and withdrawing (depends on Blockchain)
• No need for an Internet connection to carry out some actions (e.g. to sign a transaction)
• Anonymity: there is no KYC process
• Reduced 3rd party risk

Cons

• More responsibility: only you control your funds
• “Not your keys, not your coins”: account recovery is impossible if the private key is lost
• Higher fees on DEX services (e.g. transaction requires a fee which depends on Blockchain)
• High entry threshold for users

Which is better: custodial or non-custodial wallet?

The practical differences between custodial and non-custodial wallets are modest, but the security and peace of mind differences are substantial.

Custodial wallets transfer your private keys and asset protection to a third party while providing convenience and accessibility. Non-custodial wallets give you complete control over your keys and are arguably safer. Therefore, it comes down to your preferences, how much control you want over your assets, and what features you need.

Choosing between a custodial wallet and a non-custodial wallet is a key decision when it comes to securing your cryptocurrency holdings. Some people prefer a custodial account, while others prefer non-custodial wallets, and still, others use a combination of both. Whatever strategy you choose, make sure to constantly adhere to the most secure practices possible.

At WebbyLab, we provide Blockchain wallets development: we specialize in creating both custodial and non-custodial wallets. Whether you need a custodial or non-custodial eWallet development service, get in touch with us to get a solution that matches your requirements.