Tale of the Two Wallets: Custodial vs Non-Custodial

NEVER SHARE YOUR PRIVATE KEYS!

“Not your keys, not your wallet” or “Don’t share your private keys with anyone!”.

You probably have heard one of the two warnings before. Deciding how to store your funds is a big concern. At that point, you must decide what type of wallet you will use to store. There are two types of wallets.

Non-Custodial Wallet

Non-custodial wallets give you full responsibility for your private keys, seed phrases and funds. Thanks to non-custodial wallets, you don’t have to trust a third party. Once you created the wallet, you must secure your private keys and find a strong password to use non-custodial wallets.

Most of the non-custodial wallets are browser-based or mobile app like Go Pocket, this type of wallet is also called a hot wallet. On the other side, there are cold wallets like Ledger Nano, they are USB like wallets that store your private keys, offline.

The downside of the no-custodial wallet is that if you lose your seed phrase, forget the password or somehow can’t access your wallet, you can’t recover your wallet so you can’t use your funds anymore.

Make sure that you have multiple copies of the seed phrase and password. Also, be sure that no one has physical access to those copies.

Non-custodial wallets have an integral role to achieve a fully decentralized world but it might be hard for newbies.

Custodial Wallets

If you ever used central exchanges before, it means that you have used custodial wallets before. In this case, central exchanges hold your funds as a custodian. The exchange has your private keys and seed phrase. It means that they can manage your funds whatever they like. Most exchanges do not abuse that but there are some bad examples in past such as Mt. Gox. Additionally, some central exchanges provide custody services to institutional customers. ETFs/ETPs are an example of custody services, as well as central exchanges.

Comparison

Non-custodial wallets give you the full responsibility of the private keys, seed phrases and funds. On the other hand, custodial wallets hold funds, private keys and seed phrases for you.

While you’re using custodial wallets, you have to trust a third party. On contrary, while using a non-custodial wallet, you have to secure your keys, seed phrases and password.

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