Custodial vs. Non-Custodial Wallet: Which One To Choose? | OWNR Wallet

A crypto wallet is a hardware device or a software application, also known as a digital wallet, and can be used on a computer or mobile device. It helps to store digital assets and also provides a simple and fast option to send and receive crypto payments. Crypto wallets can be divided into the following categories: custodial and non-custodial. But, how to understand which type of wallet is better for your needs? In this article, we will analyze both of these choices, explore their definitions, outline their distinguishing features, benefits, and drawbacks, and provide you with all the necessary information to make the right decision.

What is a custodial wallet?

Custodial wallet services such as an exchange or online wallet service assist their clients by providing them with the crypto wallet of their choice. Moreover, they manage the private keys of the wallet on behalf of the owner. As a result, the users are reliant on the service provider to keep their funds safe. They offer the convenience of not having to worry about forgetting private keys or secret passwords or bother making a backup of the wallet. Thus, they are likely more suitable for beginners, since they are more simple to use than non-custodial crypto wallets.

How does a custodial wallet work?

The exchange itself is responsible for managing the client’s custodial wallet, which means that the client has neither exclusive nor direct control of their private keys. The client can access the hosted wallet from anywhere in an easy and fast way. This can be convenient, as wallet users don't need to take the responsibility of protecting their private keys or backing up their wallets, since the custodial exchange does it for them.

What is a non-custodial wallet?

Non-custodial crypto wallets are managed entirely by the user. They may require more effort to be established and handled, but they ensure a significantly higher level of security since only the user owns their private keys. Thus, if the service provider has a security breach and is compromised by hackers, or even if the exchange goes out of business, the user’s funds will still be safe.

OWNR is a representative example of a robust non-custodial crypto wallet. This multifunctional application allows you to make any purchase, as well as exchange and safely store all your crypto assets since you are the one who keeps entire control of them. Try out OWNR wallet now by simply downloading the mobile or desktop application.

How does a non-custodial wallet work?

With a non-custodial wallet, there’s no need to entrust all your funds to a third party. It operates by taking your desired currency and storing it on the blockchain. This means that you don’t have to rely on an external party for your financial security since it isn't held in someone else's possession or tied to some kind of online account.

Block with a link to the article: Types of crypto wallets

What types of non-custodial wallets exist?

Non-custodial crypto wallets are divided into two main categories: software and hardware wallets. Moreover, non-custodial software wallets are divided into desktop, mobile, and web solutions.

• Desktop wallets are installed on a laptop or PC and provide users with complete access to their private login details and secret keys.
• Mobile wallets are applications that can be installed on a mobile phone and operate similarly to desktop wallets.
• Web wallets, which work via a web browser, are generally regarded as less reliable than most crypto wallets.
• Hardware wallets are external devices, such as USB sticks, that can be used to conduct offline transactions and store the user's secret keys.

Each type of wallet has its advantages and disadvantages, so it's important to decide carefully, after doing careful research, which is the proper wallet for your trading strategy.

Hardware Wallets

Hardware wallets are portable devices that protect the user’s private keys from hackers by keeping them offline. They resemble USB sticks, and are recognized to be the safest type of non-custodial wallet because they are not linked to the network, making them less vulnerable to hacking.

Web-Based Wallets

Web-based non-custodial wallets can be accessed via a web browser. These wallets provide a high level of flexibility and security. They can be used on any device that has an internet connection, protecting the user’s private keys from being exposed online. Such wallets are thus an appealing option for those looking to securely store their crypto assets.

Mobile Wallets

A mobile wallet is a special cryptocurrency application that is installed on a mobile phone to easily track all crypto transactions, as well as store private keys and data. As a result, this type of cryptocurrency wallet is usually non-custodial.

Differences between a custodial and non-custodial wallet

1. Private key

In a custodial wallet, users do not need to generate or manage their own private keys, which can be complicated and time-consuming. However, the fact that the private keys are not solely under the control of the user can make them unreliable and easily compromised.

Conversely, the key feature of non-custodial wallets is that the holder has full control over their private keys and assets. This means that only the owner of the wallet can access and spend their funds.

2. Transaction type

In order for a custodial wallet owner to make a transaction, the exchange that is responsible for and manages the account should confirm it by signing with their private key. This means that a third party can see all the details of the transactions, including the amount and the addresses involved. They can also choose not to sign the transaction, which would prevent it from going through. Most custodial wallet providers may also charge fees.

To start using a non-custodial wallet, you first need to connect it to a blockchain. Once the wallet is linked, you can start sending and receiving cryptocurrency. For each transaction, you will need to enter your public address, which is like your bank account number, and your private key, which is like your PIN number. Once these credentials are correctly inserted, you can hit send, and the transaction will be completed.

3. Security

As we have already mentioned, non-custodial wallets are considered to be a safer choice. This is because custodial crypto wallets are subject to the security risks of the platform or service that they are hosted on. Moreover, in a custodial wallet, the funds may be jeopardized if the platform is hacked or compromised.

With a non-custodial wallet, however, only the holder is responsible for their private keys, and therefore, their funds. As long as the keys are secure, all of their crypto coins will be safe. Of course, non-custodial wallets also have their own risks and drawbacks. For example, if the private keys are lost, it will be impossible to access the stored funds.

4. Support

Users of non-custodial wallets are solely responsible for their private key management and other security practices in order to keep their coins safe. As such, this type of wallet generally only provides basic customer service and related support.

However, if you use a custodial wallet, you can take advantage of their customer support if you have any problems. Moreover, you don’t have to worry about security concerns or private key management. In other words, owners of custodial wallets typically have access to more assistance in the form of customer service for dealing with issues related to transactions and address verification, as well as technical support for questions about the platform itself.

5. KYC requirements

From a regulatory perspective, the KYC requirements of a custodial wallet are often enforced as they would be with any other financial institution, as long as the crypto transaction amounts exceed prescribed thresholds.

Conversely, with a non-custodial wallet, private keys are stored by the user and not shared or stored outside of their control. As such, there are reduced KYC requirements associated with non-custodial wallets, since the user manages their own funds.

6. User-friendly

Custodial wallets are managed by and held by a third party (an exchange, a wallet provider, etc.). Thus, they are usually considered more user-friendly for beginners.

Non-custodial wallets have more advanced features and provide users with total control of their funds. As such, they require more experience and may be slightly more difficult to use for newbies. However, as technologies are constantly developing, non-custodial wallets are making the user experience more and more convenient.

7. Backup and recovery capabilities

One of the easiest ways to recover a non-custodial crypto wallet is by establishing a seed phrase that can be used to restore the wallet if it is ever lost or stolen. You can also create a backup file that can be stored on an external storage device like a USB drive.

Most custodial wallets allow you to create a backup of your wallet data. This backup can then be used to restore the wallet if something goes wrong or if you want to switch to a different provider. In addition, many custodial wallets also have recovery possibilities, which means that if you lose access to your wallet for any reason, you may still be able to recover your funds.

8. Offline accessibility

Custodial wallets don’t support offline operation, meaning that if the third party that holds the private keys goes offline, the owner will not be able to access their funds. While this may not be a big concern for some people, it is something to keep in mind when considering using a custodial wallet.

Non-custodial wallets tend to be more user-friendly, as they do not require you to entrust private keys to a third party and thus they can operate offline. However, it is important to note that not all non-custodial wallets are necessarily accessible offline. While some of them do offer offline functionality, others do not, so it is important to check before deciding which online wallet to use.

9. Future scope

The future of non-custodial wallets is looking very bright indeed. Recent advancements in technology have made them much more secure and user-friendly. Thus, non-custodial wallets are becoming increasingly popular among cryptocurrency investors.

Custodial wallets are commonly used by beginner or casual cryptocurrency users who prefer to avoid the process of setting up a non-custodial wallet. As the cryptocurrency industry continues to grow, it is likely that custodial wallets will continue to attract attention from these particular groups of crypto users.

Custodial vs. Non-custodial Wallet - Comparison Table

Difference	Custodial	Non-Custodial
Private Keys	Third party controls the holder’s credentials	User generates and owns the passwords
Transaction type	Transactions need time to be processed;Less privacy	Transactions are reflected in real-time;Increased privacy
Security	Less secure	More secure
Support	Full assistance	Basic assistance
KYC requirements	Enforced	Reduced
User-friendliness	Easy for beginners	User-friendly but require more experience
Backup and recovery	Yes	Yes (with a seed phrase)
Offline access	No	Yes
Future scope	Usually used by newbies	Is gaining widespread popularity due to its robust security and increased cost-efficiency

Non-custodial wallet

Non-custodial wallets have become increasingly popular in recent years, as they offer greater security and control over one's finances. Although, potential drawbacks also exist when using a non-custodial wallet. Here are some major pros and cons to consider:

Pros

• Greater security: Non-custodial wallets are usually more secure than custodial wallets, as they do not rely on a third party to protect users’ secret keys and manage their funds. This means that the crypto assets are less likely to be hacked or stolen.
• Greater control: With a non-custodial wallet, the holder completely controls their crypto funds. This can be useful for those who need to have constant access to their funds to be available when they need them.

Cons

• Less convenience: Non-custodial wallets are less convenient than custodial wallets because users must take full responsibility for backing up and securing their funds.
• Increased risk: Although non-custodial wallets provide greater security, they also carry a higher risk of loss. If you misplace your secret keys or forget your passcodes, you will end up losing access to all your funds indefinitely.

Custodial wallet

Custodial wallets held by a third party, such as an exchange or online service. There are both pros and cons to using this type of wallet.

Pros

• One advantage is that custodial wallets are typically straightforward to use. They often have user-friendly graphical interfaces, allowing users to have direct access to their funds with just a few clicks.
• Another benefit of custodial wallets is that a third party is responsible for safeguarding the private keys. This feature may be better suited for crypto holders that are just getting started.

Cons

However, there are also some drawbacks when using custodial wallets, such as:

• Users do not have full control over their funds. The custodial exchange that manages the account may fail or even go bankrupt, leading to significant losses.
• Additionally, custodial wallets may also charge high fees, which can also eat into the holder’s earnings.
• Block with a link to the article: Hot wallet vs. Cold wallet

Conclusion: Is a custodial or non-custodial wallet better?

Before deciding which crypto wallet better matches your investment goals, you need to carefully examine the features of custodial and non-custodial wallets. The key characteristic of a custodial wallet is that a third party, such as a cryptocurrency exchange, manages your funds as well as your private keys. A non-custodial wallet is one where you store your private keys, either on your computer or on an external physical device.

Each type of wallet has its advantages and drawbacks. While custodial wallets are considered more user-friendly, they lack security, since the holder relies on the security provided by a third party. Non-custodial wallets are more secure since you handle your own private keys, but they can be more cumbersome to use and require a greater degree of technical expertise. Finally, which type of wallet to use is determined by the user's individual needs and preferences.

FAQ

Are non-custodial wallets safer?

Non-custodial wallets are thought to be safer and more protected than custodial wallets. You have complete control over your secret key and thus your crypto funds when using such a crypto wallet. All your crypto coins should be safe as long as the wallet remains secure and protected with a password.

Can a non-custodial wallet get hacked?

Non-custodial wallets allow you to retain full control over your private keys, making them less likely to be hacked. However, it is important to note that no wallet guarantees total safety. Strong security measures, such as storing your private keys offline, can help you reduce the risks of hacking, but they cannot eliminate them.

What's the difference between a hosted wallet and a non-custodial wallet?

A hosted wallet is usually provided by a third-party source, such as an online service or an exchange. The private keys are handled by the provider of the wallet. As such, you don’t have complete control over your funds. Conversely, with non-custodial wallets, you manage your private keys, meaning that you have full control over your funds.

Do all exchanges offer custodial wallets?

Not all exchanges offer custodial wallets. There are many non-custodial exchanges out there that do not offer custodial wallets. These exchanges usually have lower fees and offer more control over your coins. Thus, if you are new to the cryptocurrency sphere, it is wise to get started with a custodial exchange.

Why are custodial wallets considered unsafe?

A custodial wallet is held by a third party, such as an exchange or online service. This type of wallet may be unsafe, because you do not have full control over your funds, and if the company goes out of business, or even goes bankrupt, you may lose your money.