Custodial vs Non-Custodial Wallets

By Mark Anstead | Tech stuff | 4 Apr 2022


Where to keep your prized, perhaps only newly acquired, crypto? In a wallet, of course. A wallet is the first foundation of your interaction with the Web 3.0 economy. A wallet holds your tokens, you sign transactions with your wallet, and log in to any number of decentralized apps with it so you can participate, play and profit.

Wallets come in two distinct forms – custodial and non-custodial. It is crucial that you, dear crypto user, understand the difference. Before we explain it, note that neither wallet actually has anything ‘in’ it, so to speak. Rather, the public key the wallet has represents your claim to tokens on the ledger, or blockchain. The private key is the means to access it.

What are Custodial Wallets?

A custodial wallet is not your wallet. Rather, it belongs to the service, company, or website giving it to you. They control the public and private keys. Think of it like a standard bank account. You open the account with the bank, you give them your money, they do whatever they want with it – but you have a representative claim on the bank’s assets that they must (hopefully) pay out when you ask them to.

Of course, this means they might not. Custodial wallets, for example a wallet you might have on a centralized exchange, can have the funds in it blocked at any time, and frequently do for various reasons. Sometimes, as often in Coinbase’s case, the servers experience the fabled ‘heavy load.’ – often at crucial junctures. Occasionally Binance will disable withdrawals for a particular coin for reasons sometimes unexplained. It could be worse, a nefarious actor in charge of your custodial wallet could, if they choose, drain it of funds. Why? Because they own the private key to the wallet, and thus own the crypto within it.

coinbase-outage Image from Coindesk  

This is where the adage, ‘Not Your Keys, Not Your Crypto’ comes from. And it’s true. It’s more true than you might believe. If Binance, say, absconded with your crypto, there currently exists no legal recourse to get it back. A court would just shrug. It wouldn’t even be theft, because you don’t own the crypto with a custodial wallet. Technically, they’re not stealing it at all, they’re just closing your account with them.

Non-Custodial Wallets

In crypto terms, the private key is your wallet. That’s what allows you to spend your bitcoin on the blockchain. It’s derived from a seed phrase. A seed phrase can play host to multiple private keys. The private key is algorithmically derived from the seed phrase, which you can use to restore your wallet, and the private keys within it.

A non-custodial wallet, like Numio’s, means you keep control of your private keys. If a custodial wallet is akin to giving your crypto to a bank, then a private wallet is like an old-fashioned pocket wallet. It’s in your custody, and it’s your responsibility not to drop it on the bus or leave it on the table at the restaurant.

numio-defi-update  

This personal agency and responsibility can be frightening, of course, and is why custodial wallets are popular. Yet a non-custodial wallet is in tune with the original vision of crypto, where the individual has total control and agency over their money.

Non-custodial wallets can be browser-based, app-based or even hardware-based. Fundamentally, a seed phrase is the wallet, and as long as you know it – either in your head, on a piece of paper or screenshotted on your phone (please don’t do this), then you can reload your wallet even if all your devices which have it on fail.

Keep it Secret, Keep it Safe

image  

Whether to use a non-custodial or custodial wallet is, of course, a matter of personal preference. A custodial wallet does offer you the ability to not worry about your private key, just your username and password. However, a non-custodial wallet, for anyone truly invested in the crypto space, is essential. What’s the point in a decentralized ledger if centralized companies hold all the keys? To some, the security is worth it. To others, it absolutely is not.

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Mark Anstead
Mark Anstead Verified Member

Co-Founder of Numio


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