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Custodial vs. Non-Custodial Wallet: Understanding the Difference Points

Summary

Crypto wallets are of two types custodial and non-custodial. Third-party has control over private keys in custodial wallets. But require your permission for sending and receiving funds. Whereas, you have control of private keys in a non-custodial wallet. Blockchain technology is used in non-custodial wallets. The pros and cons of both wallets make the way of understanding the differences easy.

Introduction

Cryptocurrency, NFT, Metaverse, and blockchain there is so much hype over these technologies and terms. The estimated number of users of blockchain wallets in the world was 66 million in 2021. And now the world has around 320 crypto users worldwide. Crypto wallets are of two types. Hot wallets are also famous as a software wallet the ledger wallet and real crypto assets. You will know about the custodial vs non-custodial wallet in the write-up.

Many software development companies build custodial and non-custodial wallets. Our app development company has developed wallets as per the demand in the market. Since blockchain technology is used in wallet building, skilled developers who know blockchain technology are crucial.

The use of physical money has become negligible and crypto assets have become popular. People want more security and less trouble while making payments and digital wallets provide this comfort. Well, ‘wallet’ is a term used for software and hardware that hold cryptocurrencies. Explore more about them in this post.

What Are Custodial Wallets?

If you know what are custodial and non-custodial wallets before moving to other sections of the blog, it will define custodian meaning and help you understand better.

Custodial wallets are managed by third-party. It owns the private key of your wallet but requires your permission before making any transactions.

New users prefer custodial wallets because they can’t manage a private key. It gives them comfort because in case, if they forget the password, still they will not lose access to funds. On the other hand, if a non-custodial wallet holder forgets his password he can’t recover the funds.

What Is a Non-Custodial Wallet?

Non-custodial crypto wallet holder has control of the private key. So, he is the only verifiable owner of the fund. The non-custodial holders have complete control over the funds. It is because they have access to the wallet’s private key. They have the sole responsibility for the funds in the wallet.

However, this type of wallet is a bit more technically complex. That’s why only experienced crypto users go for them. They are browser-based and allow people to be their own bankers. The two most important type of non-custodial crypto wallets is software wallets and hardware wallets. You can get any type of wallet from the wallet provider.

Software wallets require a computer hard drive for storing and encrypting a private key. At the same time, hardware wallets are USBs, flash drives, and others. They keep the private keys in cold storage. That’s why also called a cold wallet. You have to connect this type of wallet to a computer and mobile device to come online. Moreover, this type of wallet offers advanced security features.

What Is a Blockchain Technology?

Blockchain is an important technology to develop the best non-custodial wallet. It’s crucial for you to know about it a little so that you can understand the crypto wallet effectively.

Blockchain data is chronologically consistent so it’s impossible for anyone to delete and modify the data without permission.

Since its one of the most secure emerging technologies, it is used to create an immutable ledger and make safe payments, and transactions. Likewise, the technology offers other notable security features.

What Are Private Keys?

It is a piece of information that is written in letters and numbers. It’s a kind of secret number used for cryptography. It is as secure as a password, even often more secure. It proves the ownership of the blockchain address.

A private key is an integral part of cryptocurrency because it protects users from unauthorized access and stops others from impersonating you. A private key is unique and used by the owner whereas a public key can be used by anyone and is used to identify the user.

Private and public keys are the concept used in databases to protect and identify data.

Custodial Wallets and Non-Custodial Wallets: Differences Explained

Where do you want to store digital assets? You have to decide between a custodial and a non-custodial crypto wallet.

• Security
• Custodian of Private Key
• Offline Accessibility
• Transaction Type
• Backup and recovery possibility
• Future Scope

1. 1. Security

   Some data intruders can hack sensitive user data from the custodial wallet. So, the data is stored in cold and hot storage. The security features of a custodial wallet are not as strong as a best non-custodial wallet in which all the information of the user remains with him.

   Self-custodial wallets (Blockchain wallets) eliminate the risk of data stolen unless the user shares sensitive information with someone. So, if it’s a matter of security for you, going for self-custodial wallets can be a win-win situation.

2. 2. Custodian of Private Key

   The custodial of private keys is different for digital assets transactions. In a custodial wallet, a third party has complete control of private keys while in a best non-custodial wallet you have control of private keys.

   You can be free of worrying about the security and transaction complexities when a private key is not in your control (custodial). But, you have to deal with little complexities when you have control of a private key (Non-custodial) because you are solely responsible for the entire funds.

3. 3. Offline Accessibility

   If you want to get the details of funding and transactions, you will have to login into your custodial wallet. And for this internet connectivity is necessary. On the other hand, non-custodial wallets have a complete blockchain environment, so you don’t need to log in for a non-custodial wallet. It is the better option due to blockchain technology.

4. 4. Transaction Type

   A transaction can be seen on a chain in real-time when you use a non-custodial wallet. But it’s not the case when you are using a custodial wallet.

   It shows, that non-custodial is again a winner in the battle of the best wallet.

5. 5. Backup and Recovery Possibility

   You have been reading that a non-custodial wallet is winning over a custodial one. But when it comes to backup and recovery, the case is different. As you know that custodial wallet has a private key with itself. So, if you ever forget your password, you still can’t lose the data because a third party got your back.

   Whereas, you can lose data and funds if you forget the password of a non-custodial wallet. It is because you are the sole authority of the non-custodial wallet’s private key. Well, this is good for extra security, but a mistake is not allowed.

6. 6. Future Scope

   Both wallets are great. But due to data breaches and hacking cases, people would prefer non-custodial wallets to custodial wallets. It helps them to send funds securely. A custodial hardware wallet would be the best option for people who don’t want to take responsibility for private key management. Non custodial crypto wallets would be the best for users who want to own their private keys.

Examples of Custodial Wallets

Here are some best examples of custodial wallets. Choose the best one from the list and be a part of the digital world.

Non-Custodial Wallets Examples

A non-custodial crypto wallet offers many features to the user. Check out the best non-custodial wallets below. After knowing about them you can find the best non-custodial wallets easily.

Positives and Negatives of Custodial Wallets

Positives and Negatives of Non-Custodial Wallets

Who Can Help You Develop a Crypto Wallet?

As you know there are many types of crypto wallets namely Trust wallet, Exodus, Electrum, Zengo, and others, various businesses find this app idea effective.

If you are also planning for the same, hire a top software development company, and share your ideas with it. An agency can help you develop a hardware wallet and a crypto wallet. Technource is one of the best companies in the USA.

You can talk to experts at Technource and get answers to all your queries. We offer app migration, AI and VR-enabled software, and maintenance services also.

Bottom Line:

I hope you liked the blog and understood the difference between custodial and non-custodial wallets. However, the number of these types of wallets is not much because of some factors. As you know, having no control of funds and having full control of funds both have some pros and cons. So, many people can’t decide which can be the right wallet for them.

Frequently Asked Questions

What is an important difference between a custodial and non custodial wallet?

The most important difference between custodial and non custodial wallets is as follows. In a custodial wallet third party owns the private key and in a non-custodial wallet, you own it, which means you have full control of funds. You can sell bitcoin and purchase crypto.

How does a custodial wallet work?

As we know that third party has all the control of funds, so it asks the user to send an amount to a particular address. A third party does all the work of the user so the user doesn't need to gain access to the key.

What is a non-custodial wallet mean?

Noncustodial means having no custody of something. Like no other but you have custody of your private keys of the wallet. They are encrypted so the security level is also robust.

What does it mean by private key?

A private key is similar to a password. It can be in the form of texts or numbers. In blockchain technology private and public keys play a crucial role.

How to create a non-custodial wallet?

Creating a non-custodial wallet is not an easy process. It requires an extensive knowledge of blockchain technology. If you want to develop a crypto wallet, you need to learn blockchain and study Bitcoin wallet, Ethereum, and other currencies.