CryptopediaCustodial vs non custodial wallets

Custodial vs non custodial wallets

Custodial wallets somehow work like a bank they have control over your funds in custodial wallets centralized exchanges or third parties hold private keys. In non-custodial wallets only you have control over your money means wallets are in the control of their owner. So in this article, we will discuss custodial vs non custodial wallets.

You must be thinking should I keep my funds in my wallet or put them in exchange? I will explain briefly about Custodial vs non custodial wallets.

5 differences between custodial and non-custodial wallets

Custodial wallets are in a control of general authorities and Non-custodial wallets are in the control of its owner and only the owner can control your wallet.

The mainly custodial wallet needs KYC when they ask for your data and in Non-custodial wallets, there is no need for a KYC.

In custodial wallets, your funds can be recovered if you forget your password because you have completed KYC there and in Non-custodial wallets can not be recovered if you forget your passwords or seed phrases.

Custodial wallets have a simple interface and its user-friendly anyone can easily use them but Non-custodial wallets are a little bit advanced and complicated to use as they have a complex interface.

Custodial wallets are less secure and can be hacked easily but Non-custodial wallets are more secure.

Examples of custodial wallets are Binance, Coinbase, FTX, Ku coin, and Okex, and examples of Non-custodial wallets are Metamask and trust wallets.

Differences explained

It basically means does somebody else have custody of your keys or are you the only person that has custody of your keys meaning your keys to your cryptocurrency? Now there are a ton of custodial wallets out there. A lot of times they’re interchanged with an exchange people will call a custodial wallet an exchange wallet. 

Some of those are Coinbase and Binance USA, KU coin, and Gate io these are just some of the different exchanges that are out there. I would call those custodial wallets and the reason that I call them custodial wallets is because you do not have the keys. When you set up an account with one of those websites they create your account and they maintain everything for you. 

As a beginner that might be the quickest way to get into cryptocurrency. You don’t have to remember any of your keys or anything like that, but there is a downside and the downside is that you don’t have full control of your cryptocurrency. 

Now that may not be a bad thing some people say that the current exchanges right now they’re probably better equipped to maintain your keys and your wallets then than you do. All you basically have to remember is a password to get in.

Can wallets be hacked?

Custodial vs non custodial wallets: Remember if you don’t control your keys or your wallet then there is always a potential that somebody could figure out your password and get in. Somebody could take over your cell phone do it like a sim swap and take over your two-factor authentication. Once they take over your two-factor authentication they can get in there and basically do whatever they want with your cryptocurrency. There’s always a possibility of getting hacked with a non-custodial wallet.

What are some non-custodial wallets?

Custodial vs non custodial wallets: Some of those are atomic wallet Metamask exodus and with those types of wallets, you create and maintain the keys. So when you set up an account or when you create a wallet is going to give you a seed phrase a 12-word sometimes 24 words seed phrase and that can recreate your entire wallet. 

Now the big thing with that is that the seed phrase is everything. So if you were to give those 12 words to somebody they could recreate your wallet across the world and transfer all those tokens to their own wallet. I wouldn’t say that it’s there’s more risk with a non-custodial wallet I think in all honesty there’s less risk, but it requires you to be diligent in making sure that you secure that seed phrase secure your wallet.

Custodial vs non custodial wallets

Custodial vs non custodial wallets: Typically custodial meetings and exchanges you are a lot of times limited to whatever tokens that exchanged as those are the only tokens that you can buy and sell and swap. That’s Coinbase, Binance, Kucoin, and gate io they’re they’re all the same. You can only buy and sell and trade in whatever those cryptocurrencies are that that exchange supports. With a non-custodial wallet, you are also limited to whatever cryptocurrencies that particular wallet supports.

However, a lot of these wallets support many more currencies than what the exchanges do. 100 plus currencies Coinbase does not offer that you can see some of the ones you can go and see the full list on these wallets. You can hold collectibles in here that’s a brief overview of studio and non-custodial wallets. The other thing that sort of blends this and blurs it a little bit is a lot of these non-custodial wallets like exodus and atomic wallet also have exchanges built into them. So you can actually within the wallet say I want to exchange ABC token for XYZ token and you can put in however many you want to exchange and it will tell you what you’re going to receive in the other currency.

What’s interesting is it’s not like Coinbase it’s actually doing it within their servers and within their accounts. With exodus, you’re basically sending your token somewhere, and then they’re doing a conversion, and then they’re sending you your new tokens back. I actually find that at least with exodus and also atomic the exchange rates are actually higher on here than if you were to use something like simple swap or something some other ones.

Custodial vs non custodial wallets! which wallet you should use?

Custodial vs non custodial wallets: The big thing with custodial or non-custodial wallets I actually prefer non-custodial. I don’t like the idea of somebody having access to my tokens. I’ve mentioned it before that I am a long-term holder I don’t buy and sell crypto in short bursts trying to make a little bit of money here and there. I buy tokens that I think have utility and long-term potential and I hold them for the long term.

Related: How does a crypto wallet work? EXPLAINED

So the idea of an exchange or a custodial wallet has the ability to almost like a bank or a government come in and seize control of your assets. I don’t like that ability and that’s why I suggest that you hold all of your cryptos for the long term on your own non-custodial wallet, that way you are the only one that has the keys nobody can grab and access those and take them off of there unless you say. So non-custodial is definitely the way to go.


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