Non-Custodial vs Custodial Wallets: What’s the Difference?


This Learn article will take a look at what cryptocurrency wallets are and what is the difference between noncustodial and prudential wallets.

and amazing Implications of the FTX crypto exchange He sent shockwaves through the industry. It also highlighted several important questions, including the nature of speculative investments.

Just before filing for bankruptcy, FTX suspended users’ withdrawals, citing liquidity problems – and leaving the army of angry clients without access to their hard-earned coins.

The truth is that this can happen practically to any other central crypto exchange if it finds itself in a liquidity crunch like FTX, as the vast majority of them use so-called non-custodial wallets, which means that it is the exchange that holds the clients’ funds and not the clients themselves.

This Learn article will look at what cryptocurrency wallets are, and what is the difference between noncustodial and prudential wallets.

What is a cryptocurrency wallet?

A crypto wallet is a piece of software or hardware that enables you to store, access, and interact with cryptocurrencies such as Bitcoin and Ethereum.

While hardware wallets are a stand-alone physical device used to store digital assets, software wallets are installed on the user’s device (desktop or mobile). Both hardware and software wallets store private keys – strings of letters and numbers that act, in effect, like a highly sensitive password.

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Access to a private key gives an individual the ability to send cryptographic assets from a specific public address, making private key management of paramount importance.

custodian vs non-spontaneous custodian

Custodial wallets are a low entry barrier for those new to crypto because they are easy to use and can be accessed from any device connected to the internet. However, security is a major concern.

With custodial wallets, the private keys are held by a third party, for example, a cryptocurrency exchange or a wallet provider, which means that users do not really control their crypto assets. Instead, users have to trust that a third-party custodian will secure their encryption for them.

While some providers offer insurance on the cryptocurrencies they store, custodial wallets have caused significant losses to bitcoin in the past due to mismanagement and/or negligence in terms of securing users’ funds.

In contrast, non-custodial wallets (also known as self-guarded wallets) are designed to give users complete control over their private key; However, the freedom to be a banker for themselves also comes with the sole responsibility to protect their property.

One of the most common types of unrestricted wallets are hardware, or “cold” wallets, that store private keys offline on a standalone device, often similar in look and feel to a USB drive. Hardware wallets only access the internet when you want to send a cryptocurrency transaction.

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Some non-wallets come as software that you install on your computer or mobile device and include the likes of Bitpay, Electrum, Trust Wallet, and MetaMask.

What cryptocurrency wallets are used?

Once you have a wallet installed on the device, you can buy, sell and store Bitcoin or other supported cryptocurrencies; or make any other transactions, such as payment for goods and services; or receive payments for your business.

Some wallets have a built-in option that allows you to buy and sell cryptocurrencies through integrated crypto exchanges via a dedicated tab while others require you to deposit funds first into an exchange.

Usually, you only need to know the receiving address if you want to send money, or provide your own address to receive a transaction. Many wallets make this process easier with the help of QR codes, allowing you to send or receive crypto assets in a fast and secure manner.

Greater privacy

One of the main differences between a user’s cryptocurrency wallet and a bank account in a traditional banking system is that traditional bank account numbers are directly linked to an individual’s identity, allowing financial institutions and government agencies to track transactions.

When you interact with cryptocurrencies such as Bitcoin, the transactions are pseudonymous, i.e. they can be seen on the public blockchain. But there is no direct way to associate an address with a specific individual.

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In other words, wallet interfaces enable users to interact with their digital assets in such a way that they can send peer-to-peer transfers on the network without the need for trusted intermediaries or compromising their privacy.

security aspects

There are pros and cons to holding crypto assets in different types of wallets, so it is up to you to decide on the right mix of convenience and security for your money.

In theory, self-guarded cryptocurrency wallets are mostly secure: coins cannot be stolen through a public address only, and network transactions cannot be hacked by a third party. Also, as we saw in the case of FTX, dishonest wallets can be an obvious choice for anyone looking to be a financial sovereign.

However, your money is only as secure as the private key required to access and send coins. When you interact with cryptocurrencies, there is no central authority to turn to if you lose your money, so it is most likely gone for good.

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