The Difference Between Custodial and Non-Custodial Crypto Wallets
The recent turmoil in the crypto market has renewed the discussions on the security of crypto assets. If you’ve been trading cryptocurrencies for a while, you must have heard the phrase “not your keys, not your coins.”
This article takes a deep dive into the issue, exploring the essential differences between custodial and non-custodial crypto wallets. By the end of the article, we hope you will not only gain an understanding of the different types of digital wallets but also decide which is the best option based on your needs.
Custodial vs. Non-Custodial Wallets: Summary
A custodial wallet is one where the private keys are held by a third party, typically an exchange or online service. A non-custodial wallet is one where the user holds their own private keys.
The critical advantage of custodial wallets is that they’re easy to use. You don’t need to worry about generating or backing up private keys, as the service will do this for you. The downside is that you rely on the security of the service, and you don’t have actual ownership of your funds.
Non-custodial wallets, on the other hand, give you complete control of your private keys. This means you’re responsible for backing them up and keeping them safe, but you also own your funds outright. We recommend using a non-custodial wallet if you are looking for more security and peace of mind, and a custodial wallet if you’re looking to quickly buy and sell cryptocurrencies.
Now that we have a quick overview, let's get into the topic a bit more.
What Are Custodial Wallets?
A custodial wallet is a cryptocurrency wallet where private keys to the wallet are held by a third party. The most common type of custodial wallet is an exchange wallet, where the exchanges hold private keys on behalf of their users.
The main advantage of custodial wallets is that they’re easy to use. You don’t need to worry about generating or backing up private keys, as the service will do this for you.
Another advantage is that custodial wallets are usually connected to an exchange, making it easy to buy and sell cryptocurrencies or utilize your holdings in other ways.
The downside of custodial wallets is that you’re reliant on the security of the service, and you don’t have actual ownership of your funds. If the service is hacked or goes bankrupt, you could lose your funds.
Another downside is that custodial wallets typically don’t offer the same level of security as non-custodial wallets. This is because they often sacrifice some security features to make them easy to use.
Custodial Wallet Pros
- Easy to use
- A third party handles your security for you
- Easy to buy and sell cryptocurrencies or invest in other trading/investment products
- Easy to restore your account if you lose your password
Custodial Wallet Cons
- You don't hold the keys to your wallet
- Potentially lower level of security
- You most likely need to go through the KYC and AML verification
What is the Best Custodial Wallet?
There is no single best custodial wallet that would fit everyone's needs, as most of them will fit your needs more or less depending on your knowledge level, fee tolerance, trading strategy, etc.
KuCoin offers users access to 700+ cryptocurrencies, with almost all having top-tier liquidity. Additionally, it allows its users to buy crypto with 48 fiat currencies. Last but not least, the exchange allows unverified users to enjoy a withdrawal limit of up to 1 BTC per day and trade futures up to 5x leverage. On the other hand, once they decide to go through the KYC process, their limits increase exponentially.
KuCoin offers many premium features, making it hard to compete against. However, some other exchanges may provide some additional features at the expense of others, so it's all about what you are trying to do with your newly-acquired crypto assets.
What Are Non-Custodial Wallets?
Non-custodial wallets are the complete opposite of custodial wallets. With a non-custodial wallet, you generate and hold your private keys. This means that you have complete control of your crypto assets and are responsible for their security.
The main advantage of non-custodial wallets is that they offer a higher level of security than custodial wallets. This is because you’re the only one with access to your private keys, so even if the service is hacked, your crypto assets are safe. You don't have to rely on the security features of a third party because you have your own security features set to safeguard your assets.
Another advantage of non-custodial wallets is that most of them offer access to decentralized finance (DeFi). This is because you have complete control of your private keys and can use them to do more than just store and trade cryptocurrencies. For example, you can use them to utilize decentralized applications (dApps).
The downside of non-custodial wallets is that they’re not as easy to use as custodial wallets. This is because you need to generate and back up your private keys, which can be complicated. If you happen to lose your private key or recovery phrase, you have no way to recover your funds.
Another downside is that non-custodial wallets typically don’t offer the same level of customer support as custodial wallets. This is because they’re not as common, so fewer people are familiar with them and how to use them.
Private Keys and Seed Phrases in Non-Custodial Wallets
We can't talk about non-custodial wallets without mentioning what makes them non-custodial. This is especially the case since protecting private keys is a common area of knowledge deficiency for new investors.
Private keys are unique identifiers, consisting of a long string of letters and numbers that demonstrate ownership of a specific wallet and authorize transactions.
In case of losing access to the wallet, a seed phrase, which is a sequence of 12 to 24 words, can be used to restore it. To put it simply, private keys are akin to passwords for accessing one's online bank account, while seed phrases are similar to security question answers for recovering a lost password.
Unfortunately, a significant proportion of cryptocurrency theft occurs as a result of hackers gaining access to private keys via wallet or platform hacks or scams that trick people into disclosing them. If asset owners lose or inadvertently destroy their private keys and seed phrases, their tokens may be permanently lost. This is why it’s of utmost importance that you hold your private keys and seed phrases in a safe and responsible manner if you decide to opt for non-custodial wallets.
Non-Custodial Wallet Pros
- You hold the keys to your wallet
- Higher level of security
- Access to DeFi
Non-Custodial Wallet Cons
- Not as easy to use
- You are responsible for your security
- Lower level of customer support
- Impossible to recover funds once you've lost private keys or recovery phrases
What Is the Best Non-Custodial Wallet?
There is no single best non-custodial wallet that would fit everyone's needs, but a couple of crypto wallets stand out.
KuCoin Wallet is a secure and convenient non-custodial multi-chain crypto wallet that is fully supported by the KuCoin ecosystem. The wallet’s public beta testing phase saw more than three million user registrations. KuCoin wallet is a great option if you want to send, receive, and trade your cryptos and NFTs, hold the keys to your crypto, access web3, but also stay connected to one of the largest exchange ecosystems.
Another popular option we should mention is Exodus — a popular non-custodial desktop wallet that offers support for more than 100 cryptocurrencies. It’s easy to use and has a built-in exchange that allows you to trade between different cryptocurrencies. Additionally, it offers a secure way to store your private keys, as they’re encrypted on your device and never stored online.
When accessing DeFi through non-custodial wallets, we can’t go without mentioning MetaMask. MetaMask is the leading non-custodial wallet by the number of users, with over 30 million active users. It comes in the form of a mobile/tablet app, or a browser extension, making it very versatile and easy to use.
Another popular way people use non-custodial wallets is by utilizing hardware wallets, such as ones from Ledger or Trezor. These wallets are cold storage wallets that support more than 1,000 cryptocurrencies. They are the most secure ways to store your private keys, as they’re stored offline on the device. Additionally, they offer a user-friendly interface and support for multiple languages.
Ultimately, the best non-custodial wallet for you is the one that fits your needs the best. KuCoin wallet is a great all-around product with different functionalities. Exodus will be a good choice if you’re looking for an easy-to-use wallet with built-in exchange support. A hardware wallet will do the trick if you want maximum security.
Which Type of Wallet Should You Choose?
The type of wallet you choose should depend on your needs and wants.
If you’re just looking to buy and sell cryptocurrencies or invest in other exchange products, or if you don't want to take on the responsibility of taking care of your wallet security, then a custodial wallet is a good choice. This is because they’re easy to use, and you don’t need to worry about the security of your funds. We recommend custodial wallets to crypto beginners, crypto traders, and those that aren't planning on moving into DeFi any time soon.
Suppose you’re looking to access decentralized applications or utilize your funds in some other ways or simply want to make your funds as secure as possible. In that case, a non-custodial wallet is a better choice. This is because they offer more utility than custodial wallets and a higher level of security. We recommend non-custodial wallets to users who want to take security into their own hands and dip their toes into decentralized finance.
Ultimately, deciding which type of wallet to choose is up to you. It’s essential to consider your needs and wants carefully before deciding. If you’re unsure which type of wallet is right for you, we recommend researching or even trying out both wallets to see which one you prefer.