Custodial vs Non-Custodial Wallets

Not sure whether to keep your own crypto key or let someone else hold it for you? Our guide to custodial vs non-custodial wallets can help.

Key Takeaways:

• For a custodial wallet, a third party takes custody of the private key instead of the crypto owner.
  
• For a non-custodial wallet, the crypto owner holds their own private key and, therefore, their funds.
  
• One drawback of non-custodial wallets is the lack of recovery options in case users lose their password.
  
• Non-custodial wallets, however, give users full ownership of their cryptocurrency, making them responsible for safeguarding their own private keys and funds.
  
• Crypto.com Onchain is a non-custodial wallet that lets users easily manage and store their crypto securely, and provides access to a full suite of DeFi services, all in one place.

Introduction

Selecting the best type of wallet for storing and safeguarding digital assets is crucial when it comes to owning crypto. There are many different types of wallets on the market, and things can get confusing on what to choose. 

In this article, we dive deeper into custodial and non-custodial wallets. For a quick guide on whether users should keep their own crypto key versus letting someone else take responsibility, read on.

Hot, cold, hardware, software: Learn more about the different types of crypto wallets.

Custodial vs Non-Custodial Wallet Comparison

Custodial Wallets

To understand how a custodial wallet works, it’s important to know first how crypto wallets work. Crypto wallets do not actually contain a user’s funds. Instead, they contain the public key, which lets the user set up transactions, and the private key, which is used to authorise transactions. 

As its name suggests, a custodial wallet is where a third party takes custody of private keys on behalf of users. The third party has full control over the crypto assets, assuming the responsibility of managing the user’s wallet key, signing transactions, and protecting the user’s crypto assets.

• Generally, custodial wallets are available from crypto exchanges or a custodial wallet provider in the form of a mobile or web app. Once users log in to their wallet account, they use the wallet provider’s interface to manage their funds and make transactions.
  
• This means users must trust the service provider to securely store their tokens and implement strong security measures to prevent unauthorised access. These measures can include two-factor authentication (2FA), email confirmation, and biometric authentication, such as facial recognition or fingerprint verification.

• Crypto.com’s custodial wallet, the Crypto.com App, securely holds users’ data and assets, taking many measures to ensure the protection of customer funds. 

Non-Custodial Wallets

A non-custodial wallet, or self-custody wallet, is where the crypto owner is fully responsible for managing their own funds. The user has full control of their crypto holdings, manages their own private key, and handles transactions themselves. 

• Non-custodial wallets can take on different forms. Browser-based wallets are a type of browser extension, allowing users to put in their private key and initiate transactions. Mobile wallets come in the form of downloadable mobile apps. Meanwhile, hardware wallets are physical devices. Because hardware wallets can be accessed and managed offline, many consider them to be the most secure option. 

• Non-custodial wallets provide users with a seed phrase. Upon creating the wallet, users will be asked to write down and keep a set of 12 randomly generated words, known as a ‘recovery’, ‘seed’, or ‘mnemonic’ phrase. From this phrase, the public and private keys can be generated. It also acts as a backup or a recovery mechanism in case users lose access to their original device. Anyone with the seed phrase will be able to gain full control of the funds held in a user’s wallet. In a scenario where the seed phrase is lost, the user will lose access to their funds.

• The user is in charge of managing and fulfilling each transaction. Users need their private keys to send funds and complete other transactions. Depending on the non-custodial wallet being used, the transaction can either be reflected real-time on-chain or signed offline and uploaded to the blockchain for confirmation later on.

Crypto.com Onchain 

Crypto.com Onchain is a non-custodial wallet that lets users easily manage and store their crypto, as well as provides secure access to a full suite of DeFi services all in one place. Unlike with a centralised custodial solution, users have full control and ownership of their crypto when they use Crypto.com Onchain. It also offers an additional layer of security features, wherein private keys are encrypted locally on users’ devices with secure enclaves and can be protected by biometric and two-factor authentication (2FA).

Aside from the benefits and security that non-custodial wallets bring, Crypto.com Onchain has also integrated DeFi offerings, including DeFi Earn. It also features a Wallet Extension so users can seamlessly access their funds from a browser and make transfers from different devices. 

Learn more about Crypto.com Onchain and how to set it up.

Conclusion — Custodial or Non-Custodial Wallet: Which to Choose

Both custodial and non-custodial wallets have their own sets of benefits and limitations. For users who prioritise ease of use and backup recovery options, custodial wallets are a sensible solution. But for those who want full control and ownership of their private keys, non-custodial wallets might be what they’re looking for. Ultimately, it is up to the user, and the non-custodial Crypto.com Onchain is one of many options to consider.

Due Diligence and Do Your Own Research

All examples listed in this article are for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, cybersecurity, or other advice. Nothing contained herein shall constitute a solicitation, recommendation, endorsement, or offer by Crypto.com to invest, buy, or sell any coins, tokens, or other crypto assets. Returns on the buying and selling of crypto assets may be subject to tax, including capital gains tax, in your jurisdiction. Any descriptions of Crypto.com products or features are merely for illustrative purposes and do not constitute an endorsement, invitation, or solicitation. 

Past performance is not a guarantee or predictor of future performance. The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility.