Differences Between A Custodial Wallet And Non-Custodial Crypto Wallet



There are a number of ways to keep your precious coins safe. Perhaps one of the most used methods is to use a non-custodial wallet, unless you would rather have someone else looking after your Cryptocurrency for you. One might wonder what exactly a non-custodial wallet might be. It is a digital wallet which enables users to take full ownership of their assets. Basically speaking, it is an interface enabling you to easily access your private funds. This wallet of sorts doesn’t have custody of your Cryptocurrency but rather allows for third-party integrations.

An example of this might be something like BitPay, a mobile non-custodial Cryptocurrency wallet allowing for the use of swaps, storage and spend features. These kinds of platforms make it quite easy for someone to use and there are security features in place among other mechanisms to prevent fraudulent activities.  

Image: Gerd Altmann from Pixabay

Big Cryptocurrency coins like Bitcoin and Ethereum (Ether) are among the virtual coins that can be traded and shared. The wallets used are essentially standalone physical devices used to store these precious digital assets. The software used can be installed upon someone’s desktop or mobile devices. There are private keys that are used among a series of strings, letters and numbers. It functions much like someone entering a highly sensitive password.

For someone to gain access to these private keys would be quite difficult. Cryptocurrency is considered far more secure than many banking institutions used today with Blockchain technology in place. Once things become more secure and far more used, many people should feel comfortable using such technologies.

While custodial wallets are considered a lower-entry barrier for most folks, it doesn’t mean they aren’t worth using. That being mentioned, some feel that security is still a concern. If someone were to use a custodial wallet they would not have real access or rather control of their Cryptocurrency assets. An investor would have to use the third-party custodian as a security blanket for their Crypto. 

Perhaps one of the most popular and widely used non-custodial wallets would be what is called a “cold” wallet. These are what are known as standalone devices. They very much resemble that of a USB device. Using a “cold” wallet like this makes it far more secure due to the fact it is offline and used only when someone wants to complete a transaction. Gaining access to it would be nearly impossible unless someone was quite foolish with their ways.

Often people store a “cold” wallet somewhere for safe keeping. This could be a safety deposit box at a bank or a vault safe with difficult access codes to get into it. There are private security companies out there that can handle that kind of thing for a price of course. Essentially, this gives people the freedom to become their very own banker, it is their responsibility to maintain a secure environment. Some cold wallets include Ledger, Trezor and Safepal among others.

There are some non-custodial wallets that come as software where you can opt to install them onto your computer. This includes Bitpay, Electrum, Trust Wallet and on your browser MetaMask. After someone has installed their wallet on their device, they are very much able to buy, sell and store their purchased or earned Bitcoins or other Cryptocurrencies. People can also receive air-drops, they are part of a promotional giveaway to generate buzz about a new coin or old one. Sometimes when people sign-up for financial trading apps – they can get a free disclosed amount of Cryptocurrency when they invest themselves on the application. 

While the most used coin is likely Bitcoin, it is being accepted as a method of payment in more places than ever before. Someone can use this coin very much like paper money or a credit card for buying goods and/or services and to receive payments themselves. 

There are some wallets that even have a built-in option – which allows someone to both buy and sell their Crypto through integrated Crypto exchanges on a dedicated tab, on their computer or mobile device. There are even what are known as “Hot wallets” where these digital wallets are always connected to the internet or a Cryptocurrency network of some kind. Again, security can be of concern here, choose wisely. Some more popular hot wallets being used are:

1.) Crypto.com Defi Wallet

2.) Guarda

3.) Exodus

4.) Coinbase Wallet

5.) MetaMask (browser based)

6.) Atomic

7.) Trust Wallet

8.) Electrum

9.) MyEtherWallet

10.) Coinomi

11.) Exodus

Typically, someone would have to know which receiving address they would use to send funds or to provide their own address to receive a transaction. There are many wallets out there that can process this much easier through the use of OQ codes. They can send and receive assets in a fast and secure manner. 

One big difference between someone’s Crypto wallet and a bank account in a typical banking system is their bank account numbers are directly linked to someone’s actual identity. This allows financial institutions and government agencies to track each of these transactions. Each time someone makes interactions with Cryptocurrencies such as Bitcoin they can be seen on a public Blockchain.

Enabling your account and information in a safe way does help but it is practically impossible for anything to be entirely safe nowadays including regular banking. Remember, that your funds are only as secure as the private key that was acquired. So, this person can access and send their coins back and forth. 

While a Blockchain is a decentralized system for storing data and essentially acting like a database, it does consist or is made up of “blocks”. These are units of data which are stored within the Blockchain code. Each of these numbers are unique by comparison to the previous block. This in turn creates a chain or link of blocks to examine for each transaction that occurred. Blockchain enables the very existence of Cryptocurrencies. This is among other things like the supply chain and general logistics of it all. 

A Blockchain wallet is a Crypto wallet that allows you to complete transactions. Remember though that unlike a traditional wallet, a Crypto wallet doesn’t store any of your actual Crypto funds. This is how it actually works:

First you create a Blockchain wallet and receive two different keys. One of these is a private key and the other is a public key. Then the private key becomes your “digital signature”. You wouldn’t ever want to share this with anyone, it is only for the account holder to know about. A private key is for providing ownership of the tokens within your actual wallet thereby allowing you to spend your funds if you wish.

Once you have your public key, it efficiently and essentially becomes your “account number” to be used. You can opt to share this so they can send you payment made and transactions that were completed through Cryptocurrency payments to you. Your wallet then becomes a record of each and every transaction made and the keys are used to perform these actions. Having a Crypto wallet allows you to easily exchange funds and all of the transactions which are Cryptographically signed (i.e., protected by your private key).

Image: Gerd Altmann from Pixabay

So, why would someone even use a Blockchain wallet? Well, if you own any Crypto assets, using a wallet like this will help to keep your Crypto safe and secure. This becomes quite important while buying and selling expensive assets. Nowadays, there are more Crypto hacks that have happened such as the FTX hack of 2022. This brought down a major Cryptocurrency exchange that potentially showed promise. 

However, don’t let this scare you away, things are getting better all the time. Other things to consider is the convenience of using Cryptocurrency. It provides a long-term solution for the modern world. Also, there are lower transaction fees when compared to a typical banking solution. Another plus is that with Cryptocurrency exchanges, the transactions are instantaneous. 

It is incredible to think that sites like Blockchain.com have transactions reaching in excess of $620 billion. It is one of the Cryptocurrency exchanges out there to choose from. They also claim that there are currently more than 71 million wallets created so far through their app. Other big apps being used are Robinhood and Binance. It’s best to do your research before making any big decisions but there are many options to choose from. 

Sources:

Decrypt

NordVPN

NerdWallet

Fool

CryptoPotato

Successful Blockchain And Cryptocurrency Companies To Look Out For
Investing In Cryptocurrency As A Beginner

Terry has written about a wide range of topics and is currently studying Blockchain technology and programming. https://medium.com/@tlarch

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