Crypto Wallets: Custodial vs. Non-Custodial Wallets
Not Your Keys, Not Your Coins. It’s That Simple.
Never share your private key!
When the private key isn’t yours, then the coin will no longer be yours. This is the most important concept before possessing crypto assets.
What does “wallet” refer to?
A wallet is what makes your private key (the password that gives you access to your cryptocurrency) secure and accessible.
Unlike regular wallets that hold actual cash, we usually refer wallets in blockchain as “crypto wallets”. This wallet doesn’t store crypto assets directly, but rather access crypto assets that exist on the blockchain through a private key. The private key is what proves that you own the corresponding cryptocurrency and allows transactions to take place. If you lose your private key, you will not be able to access your funds, which is why it is so important to know how to keep your private key safe.
Wallets allow us to send and receive cryptocurrency in a variety of forms, from hardware wallets like Ledger (which looks like a USB) to applications like KryptoGO Wallet, as follows:
1 Paper: The secret key is written on a physical medium such as paper and stored in a secure location.
2 Hardware (card, USB): The private key is stored in the hardware and connected to the computer and network only when sending or receiving cryptocurrency.
3 Software: The private key is stored in an APP or browser plug-in.
Deciding how to store encrypted assets is an important decision. Therefore, understanding the type of wallets is necessary for choosing which wallet works best for us. (these 3 forms above are usually non-custodial wallet presentations.)
Using a non-custodial wallet means you are fully responsible for the private key, seed phrase, and funds. Because a third party trust is not needed in non-custodial wallets, you must protect your private key and find a strong password after creating a wallet.
Most non-custodial wallets are browser-based or mobile apps like KryptoGO Wallet, a type of wallet also known as a hot wallet. On the other hand, there are cold wallets like the Ledger Nano, which are USB-like wallets that store your private keys offline.
The downside to non-custodial wallets is that if you lose your seed phrase, forget your password, or somehow can't access your wallet, you won't be able to recover your wallet and therefore can't access your funds anymore.
Non-custodial wallets play an indispensable role in enabling a completely decentralized world, but can be difficult for the newbies. Therefore, when using a non-custodial wallet, make sure you have multiple backups of your seed phrases and passwords, and that no one but yourself knows about them.
If you have previously been to a centralized exchange, this means that you have used a custodian wallet. In this case, the centralized exchange acts as a custodian and holds your funds, private keys, and seed phrases. However, this also means that the exchange can do whatever it wants with the funds (you must choose your exchange carefully), and the concentration of funds is often vulnerable to hacking attacks. In addition, centralized exchanges also offer escrow services for institutional clients, such as Coinbase Custody.
Non-custodial wallets give you full responsibility for private keys, seed phrases, and funds. Custodial wallets, on the other hand, hold funds, private keys, and seed phrases for you.
When you use a custodial wallet, you must trust the third party. Conversely, when using a non-custodial wallet, you must protect your key, seed phrase, and password.
The comparison table of non-custodial & custodial wallet