Cryptocurrency wallets are classified according to different criteria. Depending on the characteristics of the Internet connection, the wallet can be cold or hot. However, for maximum control over your assets, it is even more important to know how custodial vaults differ from non-custodial ones.
If you already have a cryptocurrency, you also have storage for it. Recall that your coins are not actually in the wallet in any form, as is the case with cash or payment cards. In fact, storage is a tool that is needed to access assets in the blockchain and perform cryptocurrency transactions.
Are you sure that your keys are really yours?
When we focus on whether there is no custodial storage, we mean that it does not contain the user’s coins, but his private key, which is needed to access crypto assets.
When you go to the centralized cryptocurrency exchange Binance to change matic to eth exchange, you create an account in which a wallet is automatically created. Most likely in this case you have no idea what your private key looks like. Technically, your funds belong to the exchange and it is she who is responsible for their safety.
If you use non-custodial storage, you keep your key, you are in full control of your balance, and you protect your assets yourself.
What are these keys? Each wallet generates an associated key pair – public and private. Each of them is nothing more than alphanumeric codes of 25-36 characters. The public key can be thought of as analogous to a bank account: you provide it to your counterparty, and he sends you a payment. The private key performs the same functions as your bank card PIN. It also needs to be kept secret. Whoever owns the key also owns the means.
Features of custodial wallets
Custodial vaults are almost always web-based and are usually provided by centralized crypto exchanges. The interfaces of most trading platforms are designed so that users do not even interact with their wallets. This is very convenient and this method of storing coins is often chosen by beginners.
Custody wallets are generally easy to connect to decentralized applications (dApps) and other financial opportunities.
Losing an account password does not become a disaster, as the user can contact the support service and the exchange staff will help solve the problem. However, custodial storage has a downside. Let’s summarize the pros and cons of this method.
Pros:
- Very simple and convenient.
- You can restore access to funds.
- Less responsibility for users
Minuses:
- Private keys are stored and controlled by a third party
- Crypto exchanges are an attractive target for hackers.
- Account creation often requires KYC and AML verification
What is a non-custodial wallet?
There is an old saying in cryptocurrency circles: “Not your keys, not your cryptocurrency.” In 2022, thousands of users, in particular, FTX clients, felt its justice the hard way.
Non-custodial storage is much more secure as the user of the cryptocurrency has full control over their private key and their funds. Non-custodial wallets tend to be a bit more technical than custodial wallets and are preferred by more experienced cryptocurrency users.
Non-custodial wallets can be software and hardware (hot and cold, respectively). Software versions are installed on a computer or smartphone, and private keys are stored on your device in encrypted form.
However, the safest way to store coins is in hardware, on a compact physical device. If you urgently need to convert BNB to BUSD to LetsExchange, such a device is briefly connected to a smartphone or computer. Most of the time, the wallet is offline and virtually invulnerable to remote threats.
Pros:
- You are in control of your keys and funds.
- You can quickly and easily create new wallets.
- You are not afraid of exchange hacks.
- You won’t have to disclose personal data to use the vault.
- More extensive functionality is available compared to custodial storage.
Minuses:
- The loss of private keys and/or the recovery phrase is tantamount to the loss of all funds.
- More experience is required to use advanced features.
Most software wallets designed for installation on desktop and mobile devices are non-custodial, with a few exceptions.
