Custodial vs Non-Custodial Wallets
- With a non-custodial wallet, you have sole control of your private keys
- With a custodial wallet, another party controls your private keys
In financial circles, custody refers to the holding of assets on behalf of a client. The use of a custodial service can be desirable to an asset holder, as it mitigates security risks like theft or loss.
In cryptocurrency, custodial solutions are those where a third party holds the private keys to the user's funds. They're the only ones able to actually send and receive the user's coins. While the owner of the cryptocurrency owns it in a legal sense, they have no ownership at the protocol level.
- With a non-custodial wallet, you have sole control of your private keys, which in turn control your cryptocurrency and prove the funds are yours. While there is no need to trust a third party when using a non-custodial wallet, this also means that you are solely responsible for not losing your keys and requires that you take your own precautions to protect your funds.
- Non-custodial wallets can be browser-based, they can come in the form of software installed on mobile devices or on desktops, or they can be hardware devices, among other options
- recovery phrase, also known as a "seed phrase", would allow anyone to "regenerate" your crypto wallet on another device, giving them access to all crypto balances associated with your private keys. With your seed phrase someone could regenerate your crypto wallet even without physical access to your original hardware wallet
- With a custodial wallet, another party controls your private keys. In other words, you’re trusting a third party to secure your funds and return them if you want to trade or send them somewhere else. While a custodial wallet lessens personal responsibility, it requires trust in the custodian that holds your funds, which is usually a cryptocurrency exchange.
- While a custodial wallet may be considered less secure than a non-custodial wallet, many prefer them because they don’t require as much responsibility and are usually more convenient
- Losing your password to a non-custodial wallet could be financially devastating if you do not take sufficient precautions. However, if you forget your exchange account password you’ll likely be able to reset it
- Most custodial wallets these days are web-based exchange wallets.