What are custodian and non-custodian crypto-wallets?

What are custodian and non-custodian crypto-wallets?

By Kluma | InterestingCrypto | 27 Jun 2020

Is it possible to do with one crypto wallet?

Keeping your crypto assets safe and sound is no less important than profitable to acquire them or earn. With the development of technology and interest in the cryptosphere, more and more attackers begin to hunt for user coins, and crypto wallets become one of their favorite goals.

Beginning crypto investors are often misled by the name of this tool: users can assume that their funds are by default safe in any crypto wallet, and prefer to store coins directly on the crypto exchange. But it is not safe.

If you have something to lose, divide the coins into those that are needed for quick operations - they can be left in custodian crypto-wallets, and those that are going to be stored - it is better to save them in non-custodian crypto-wallets.


What is a custodian crypto wallet?

Custody wallets resemble banking instruments. Their distinguishing feature is the user’s lack of full control over his means, since the operator (custodian) has access to the private key. This has its advantages. For example, having lost passwords or keys, the user will be able to access the funds again.

Many crypto exchanges (Coinbase, Kraken, Bitfinex, Binance, Poloniex, Bittrex, Coinex, Bitstamp, etc.), trading platforms and brokerage services have custody wallets. Such integration simplifies the work with other tools of these sites, is beneficial in transactions (for example, due to the lack of commissions within the ecosystem) and is effective if you remember that in fact the control over the funds belongs to a third party. Popular crypto wallets such as Freewallet, Xapo, Crypto.com also fall into this category.


What are the disadvantages of custodian cryptocurrency wallets?

Among the main drawbacks of custodian crypto-wallets are the custodian’s access to user funds and the risks of their loss as a result of hacking, fork, by decision of the authorities or the court. An unpleasant experience may turn out to be the lack of access to own funds during technical work.

For example, in the summer of 2016, hackers withdrew almost 120 thousand bitcoins from crypto-wallets of users of the Bitfinex crypto-exchange, which stored funds in a hot wallet. Neither two-factor authentication nor multi-signature prevented the theft of funds.

A vivid example of the shortcomings of custodian wallets was the closure of the Russian cryptocurrency exchange BTC-e . In the summer of 2017, the FBI arrested its servers and U.S.-based assets. Later, the site restarted under the new name WEX and again stopped working, its customers lost access to funds.


What is a non-custodian crypto wallet?

Non-custodial can be considered a cryptocurrency wallet, which retains the ability of the user to fully control the keys and their funds. This category includes hardware, mobile, paper, desktop and web wallets.

The most popular non-custodian wallets are Abra, MyEtherWallet, Electrum, MyCrypto, BitGo, Wirex, Button Wallet, Exodus, ZenGo, Paytomat, Bitcoin.com , BRD, Blockchain, BTC.com , Electron Cash, Copay, Jaxx, Coinomi, Atomic Wallet, Guarda, Wasabi Wallet, Edge.


Are non-custodial crypto wallets absolutely safe?

Not. Non-custodian crypto-wallets have their drawbacks. For example, if you lose the private key and the phrase to restore it, the funds will be irretrievably lost (therefore, you should be especially careful with the brainwallet, that is, with storing data in your own memory, or in a paper crypto wallet - on paper). Remember the story of a British miner who, in mid-2013, mistakenly threw a hard drive with 7,500 bitcoins mined in 4 years to a dump.

In addition, non-custodian crypto-wallets are also of interest to intruders. So, in the spring of 2018, the popular non-custodial Ethereum wallet MyEtherWallet lost 216 client ethers due to an attack on the DNS server: hackers redirected users to a phishing site and gained access to their private keys.

Hardware crypto-wallets (Ledger, TREZOR, BitFreezer, KeepKey, Cool Wallet, Digital Box) are considered one of the most effective and safe, although they may have vulnerabilities in the code, be physically hacked, or be lost.


How to work with a cryptocurrency wallet?

  • Save keys with password managers (LastPass, 1Password), and passwords for non-custodian wallets - in different ways in several reliable places.
  • To protect against phishing in web wallets, click on the links you saved in your bookmarks. If you enter addresses manually, it is better to do this in a new browser tab and with careful double-checking of all characters.
  • Determine which crypto assets you need to solve, and to minimize the risks, divide them into several previously studied crypto wallets.


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