Guellord MbusaFirst of all, when we are told about cryptocurrencies, these new assets which escape central banks, it is normal for us to wonder where and how are they stored?. You may already know this. Indeed, to store, trade or carry out transactions on the blockchain, the user must have a crypto wallet.
It exists several types of crypto wallets according to numerous characteristics. In this article we will look at one of the features: security. Depending on whether the private keys are held by the user himself or a third party), we distinguish two types of crypto wallets. These are the so-called custodial (custodial) wallet and the non-custodial (non-custodial) wallet.
In the following lines, we will develop the differences between the two. Before talking about the differences, let's see what is a crypto wallet?
What is a crypto wallet?
Above all, it is important to keep in mind that cryptomonnaies are digital assets that are not available in physical form. Their storage or holding is different from the holding of traditional currencies (trustees).
Basically, a crypto wallet is a physical medium or program that stores public and private keys and can be used to receive or spend cryptocurrencies. In other words, crypto wallets do not actually store cryptocurrencies but information that links users to their funds in order to ensure their security. Depending on whether the private keys of the wallet are held by the user himself or a third party, we distinguish between custodial and non-custodial wallet.
Let's see the differences between the two types of wallets.
The custodial wallet Vs the non-custodial wallet
They are talking about crypto wallet custodial to designate a crypto wallet whose private key is held by a third party and not by its owner. To better understand, refer to the service offered by all of the centralized exchanges for storing cryptos.
On the contrary, a non-custodial crypto wallet is a crypto wallet whose private key is held by the account owner. Certainly, the difference between the two wallets seems slim; Yet it is of capital importance.
–> Read the article to find out 7 ways to protect your cryptocurrencies.
What are the advantages of a custodial wallet?
One of the highlighted advantages of a custodial wallet is that its user does not need to manage the security of their assets themselves: A trusted third party takes care of it.
It is a means of storing cryptocurrencies suitable for beginners in the ecosystem since it requires less technical knowledge to use. It offers its user the possibility of making withdrawals from a very large number of block chains with ease and very low transaction fees. And, even in the event of loss of identifiers, there are relatively simple and quick procedures to regain access to your account.
The disadvantages of a non-custodial wallet:
However, using a custodial wallet involves a number of risks. Indeed, when a third party holds your private keys you are not really the owner of your cryptos. As said so well Andreas Antonopoulos, host of speaking of Bitcoin: “ Not Your Keys Not Your Cryptos ". To say that investors should only be sure of holding their cryptocurrencies if they are stored in wallets for which they hold the private keys.
As in the traditional banking system, it can happen that a crypto exchange freezes your assets without you having a say. The practical example and the sad and recent episode of the descent to hells of the FTX platform. In addition, it is often tempting for a hacker to attempt to attack the accounts of an exchange given the astronomical sums deposited there. If your keys are stolen then your funds may evaporate. The cyber attack of the Mt.Gox exchange platform in 2014 tells us a lot about this potential risk.
-> History of the first crypto exchange platforms
What are the advantages and disadvantages of a non-custodial wallet?
Contrary to everything we have developed on the advantages and disadvantages of a custodial wallet, a non-custodial crypto wallet offers the user the possibility of fully holding their cryptos by keeping their own private key.
However, this full ownership comes at a price: the user becomes, in fact, solely responsible for his or her funds. If your private key is lost, forgotten or stolen, it's over. In this case, its funds are permanently lost. There is no customer service to call or any other form of recovery of your cryptoassets in the event of loss of the private key.
So what is the best crypto wallet for the security of your cryptos?
Both types of wallets can be used depending on your activity. As if to say, “our diversity, our wealth”. In fact, there is not one best crypto wallet that the other. Each of these two crypto wallets has its advantages and disadvantages.
Each user can therefore choose this or that other crypto wallet. However, in choosing between using a custodial or non-custodial wallet, it is important to look at the user's experience in the ecosystem as well as their profile.
Which wallet for these few user profiles?
For beginners: it is best that they start by holding custodial wallets. This limits errors initially while they become familiar with the ecosystem. Once more experienced, they will be able to use non-custodial wallets with little chance of making mistakes in technical manipulations.
👉 For an active trader: given that he needs to obtain the best prices and make transactions constantly, it is preferable that he uses a custodial wallet on a centralized exchange platform (or decentralized) for low costs and ease of use.
👉 One passive investor: unlike the previous one, this one seeks to hold nuggets with high potential. For a passive investor it may be safer to keep their funds in a non-custodial wallet.
👉 Finally, for a fan of DeFi, the non-custodial browser extension type wallet (like Metamask) is also recommended for navigating through the ecosystem. Although more and more exchanges offer similar services in their offering.
Examples of some non-custodial wallets
Now that you know the clear difference between custodial and non-custodial wallets, here are some examples of non-custodial wallets.
They are subdivided into 3 distinct categories:
Browser extensions: These allow the user quick access to their cryptos with a simple Internet connection on their browser.
- Metamask: He is the leader in the sector. This EVM wallet (Etherium Virtual Machine) compatible is the most used and best known non-custodial wallet. It allows you to interact with any blockchain EVM compatible.
- Trust wallet: It is a non-custodial wallet launched in 2017 and purchased in 2018 by the Binance exchange platform which made it its official wallet. Today, Trust Wallet also has a browser extension for optimal use.
Note that in this category there are also very specific wallets designed to interact with a particular blockchain. It is in particular to Phantom for Solana or kepler for Cosmos.
Software applications to install locally on your computer.
- Wallet Exoduss is the best known of them. It allows you to install the software on your computer or smartphone and manage your crypto wallets from the application.
Hardware wallets which are the must in terms of crypto security.
- The wallet Ledger is a leader in this sector. With its Ledger Nano S/X, the company enjoys a solid reputation and offers a very wide range of cryptos.
- Wallet SafePal wallet which is the cheapest wallet on the market currently. You can get it for less than 50 euros.
- The brand Trezor is the main competitor of the French Ledger in the hardware wallet sector. Very similar to Ledger, it offers 2 flagship models: Trezor One et T. They both allow the storage of a very large number of ERC-20 tokens as well as most major cryptos (BTC, LTC).
Conclusion on the difference between custodial and non-custodial wallets:
As you will no doubt have understood, the choice between using a non-custodial or custodial crypto wallet is not at all easy.
It is actually a choice between security and freedom. In other words, when a user wants more freedoms, they choose to store their cryptocurrencies on a non-custodial wallet. Therefore, he accepts the responsibility that comes with it. On the other hand, if the user wants more security for their crypto assets, for fear of permanently losing their funds, they opt for placing them on a centralized exchange.
Knowing the differences between the two types of wallets, it is everyone's responsibility to choose which one is best for them. For crypto fans, we know how difficult it is to make a choice between freedom and security.
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Note: No financial advice is given in this or any other article on zonebitcoin. This is information of which you are the sole judge and master. Be responsible with your investments and only invest as much as you are willing to lose.
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