The idea behind cryptocurrencies is to decentralize, giving each user completely independent control over their funds and managing private keys. There is a phrase “not your keys – not your bitcoin”. Nevertheless, today many services (crypto wallets and crypto exchanges) provide custodian services, that is, they themselves are engaged in storing user funds. In some situations, this is even convenient.
The editorial staff of Profinvestment.com proposes to consider the pros and cons of custodial and non-custodial wallets.
What are non-custodial and custodial wallets ?
A non-custodial wallet is a type of decentralized wallet in which the client owns their private keys. At the moment of creating a wallet, the user is given a file with private keys, as well as a mnemonic phrase, with which it will subsequently be possible to restore access to the management of funds.
In contrast, a custodial wallet stores the client’s private keys on its own side and is responsible for backing them up and securing user assets. The answer to the question of why many users agree to such terms is convenience. Wallets of this type are much easier to learn, access to them is carried out simply by login and password, at the touch of a button.
The advantages and disadvantages of each option
✅ At the moment, providing custody of funds to a third party is the only way to trade on the most popular cryptocurrency exchanges such as Binance.
✅ There is no risk of losing your keys or seed phrase, as if you kept them.
✅ Those who are not versed in network security may be better off entrusting the storage of their cryptocurrency to professionals.
✅ These services are easier and more convenient to use.
❌ Custodian wallets / exchanges are centralized and operate on principles very similar to traditional financial systems.
❌ We have to rely on the honesty of the platform developers.
❌ You also do not control security, it depends on other people’s actions, knowledge and skills.
Pros of non-custodial wallets: ✅
✅ Complete confidentiality when making transactions, no need to provide the intermediary with information about your payments.
✅ Full control over your cryptocurrency, flexible management – for example, a combination of several different types of storage wallets.
✅ Access to various advanced non-storage features.
Cons of non-custodial wallets: ❌
❌ It is less convenient to access centralized tools.
❌ You need to understand security issues and pay great attention to it.
❌ More complex user interface.
1. Holy Transaction
Holy Transaction is a custodian wallet for mobile devices and PCs, which also supports the functionality of an exchange with the exchange of crypto-crypto and crypto-fiat. Supports thirty digital coins. You can buy assets using a bank card. According to the developers, in Holy Transaction, users’ money and information are protected by the most modern security measures.
The main mission of the company is to make all the main functions available under one account at once – secure storage, trading, tracking.
Coinpayments is a custodian wallet that supports nearly 2000 different coins and also provides trading platform services. Most often used as a cheap and fast gateway to receive or send crypto payments. You can work with the service both from a browser and from a mobile device; there are applications for Android and iOS.
The service can be integrated as a plugin with many popular e-commerce platforms. You can also buy gift cards from hundreds of retailers (Adidas, Nike, Uber, etc.) through CoinPayments. For instant transactions, GAP600 is connected.
Xapo is a custodian mobile wallet that focuses on three aspects – convenience, security and availability. The application allows you to store and quickly exchange 150+ cryptocurrencies. User keys are stored in ultra-secure cold wallets physically located in Switzerland and around the world.
Patented data encryption technology enhances funds protection. The service also uses the principles of multi-factor authentication and private key segmentation. Xapo’s security has been approved by a number of expert publications (Bloomberg, Wall Street Journal, etc.).
Other custodial crypto wallets:
4. Centralized cryptocurrency exchanges
These sites can also be considered custodial vaults for funds. User accounts do not have personal private keys, and in the blockchain, all transactions outgoing from or coming to the exchange refer directly to the site’s addresses. The crypto exchange is responsible for saving user assets, withdrawing and exchanging them.
Popular custodial cryptocurrency exchanges: Binance, EXMO, Bybit, Livecoin, Kraken, Coinbase, Gate, KuCoin, Huobi, Bitfinex, etc.
5. Trust Wallet
Trust Wallet is officially supported by Binance exchange. To start using it, the user needs to download the application and create private keys. As a result, no one other than the client himself can access his funds.
Additionally, Trust Wallet supports a browser for decentralized applications and work with collection object tokens. You can buy cryptocurrency directly from your bank card. There is a possibility of staking some tokens directly in the wallet.
The Metamask non-custodial decentralized wallet is installed as a browser extension. Private keys are stored on the user’s device, and the client also saves the seed phrase for himself in case of subsequent recovery.
To use the wallet, just click on its icon and select the desired action (send or receive cryptocurrency, buy it from a card, add a new token to the list). Ethereum and all the tokens running on its blockchain are supported.
Edge allows you to store and trade dozens of cryptocurrencies in one application. The functionality makes it possible to buy coins for fiat from a card. Security and ease of use determine the popularity of the service among both beginners and experts.
Secure access via PIN or Touch ID, as well as backups with login and password only make it easy to manage the wallet, but only the user owns the keys.
8. Hardware wallets
Ledger, Trezor, Coolwallet, Keepkey are physical wallets that allow the user to store private keys completely isolated from the Internet. You will need to connect to the Internet only for the duration of an outgoing transaction or other manipulations. Otherwise, the small USB device is completely self-contained.
Today, hardware wallets are deservedly considered the most reliable and secure way to save cryptocurrency assets.
Other non-custodial crypto wallets:
- Bitcoin Core;
- BTC.com and others.
Despite occasional news of centralized cryptocurrency exchanges and custodial wallets being hacked, many traders and investors continue to hold significant amounts of money on such platforms. Well-known industry experts think about this:
- Stephen Quinn, manager of cryptocurrency exchanges Eosfinex and Bitfinex, believes that the future belongs to decentralized platforms. He notes that the currently existing non-custodial services are not devoid of many disadvantages (for example, low scalability, limited by the technical capabilities of the blockchain), but their most important advantage lies in the absence of storage.
- Curtis Spencer, managing partner at venture capital firm Electric Capital, notes that non-custodial services are not as transparent and censorship-free as commonly believed, but it is still cleaner and more community-driven than custodian platforms.
- Alan Curtis, CEO of Radar Relay wallet, says that the introduction of non-custodial functions is a big leap into the world of decentralized finance. Since 2011, more than 50 hacks have been identified on centralized exchanges, resulting in the loss of private user information and billions of dollars.
- Eric Voorhees, CEO of ShapeShift, talks about the need to take people away from custody services. Non-custodial wallets and exchanges provide a fundamentally secure way for individuals to store and exchange digital assets.
Cryptocurrency market trends show that non-custodial wallets will gain an edge over custodial wallets in the near future. This is due to numerous cases of security breaches of centralized services. Users are increasingly jealous of their funds and privacy. Non-custodial services offer ample opportunities and have good prospects, so it is highly desirable to master working with them.