Non-custodial wallets give users greater control of their crypto assets, enabling them to store and manage cryptocurrencies securely and without needing to rely on third parties. Non-custodial wallets place all of the control and responsibility on the user. This is different from custodial wallets, which give the responsibility of holding private keys to a centralized exchange or service provider.
This blog breaks down what non-custodial wallets are, how they work, and all of their uses.
What are non-custodial wallets?
Non-custodial wallets generate and store private keys locally on a device, such as a smartphone or hardware wallet. This private key is a cryptographic combination of letters and numbers that is unique and allows the user access to their crypto assets. The private key remains with the user, giving them complete control over their funds and total responsibility for their security.
Types
Crypto wallets come in all shapes and sizes. The same is true of non-custodial wallets.
- Browser wallets. Browser wallets function as browser extensions on a web browser.
- Mobile wallets. Downloadable mobile apps to be used on smartphones.
- Hardware wallets. Physical devices that store private keys offline.
How do custodial wallets offer control?
Enhanced security. Non-custodial wallets give the responsibility of security to the user. This means that there is no trust or responsibility given to a third party which may be at risk of hacks or fraudulent activity. With non-custodial wallets, only the user has access to their private keys, and this allows them direct access to the blockchain, reducing the exposure of a person’s private data to the outside world. These wallets use strong encryption that securely stores data and utilizes multi-factor authentication. Robust backup options are also available, including seed phrases and encrypted backups allow for a safety net in case of loss of funds.
True ownership. A user’s crypto assets are truly owned and controlled solo by the owner. Custodial services, on the other hand, work more like a bank, where your assets are held on your behalf. If that entity experiences a cyber attack, goes bankrupt, or restricts activity for whatever reason, the user might lose access. Non-custodial wallets do not have this risk.
Choice. Non-custodial wallets are able to offer multiple blockchain networks and cryptocurrencies. Transactions happen directly on the blockchain, reducing data exposure, but also opening up many more options for crypto holders that they can enact quickly and without contacting an intermediary. Non-custodial wallets can also offer no KYC requirements, allowing users to have complete anonymity. There are a number of different kinds of non-custodial wallets, as listed above, giving users options to choose from. Offline storage options include cold wallets and offline transaction signing, allowing extra steps to keep assets secure.
What are the negatives of non-custodial wallets?
Non-custodial wallets are not infallible. In fact, it is the lack of reliance on intermediaries or third parties that can be their biggest negative. Since non-custodial wallets are dependent on individuals storing their private keys, they are solely responsible for keeping passwords secure, and remembering them without input errors or losing them. There have been plenty of stories of large wallets containing thousands of Bitcoins being completely lost. One of the largest is owned by British computer engineer James Howells, whose hard drive containing Bitcoin worth hundreds of millions was accidentally thrown away.
For new users, there is an intimidating learning curve to being completely responsible for generating and managing secure keys and blockchain transactions. By using custodial wallets, someone else has the knowledge and responsibility to handle this for the user. If a new user is using a software wallet, it is also more likely that they will be vulnerable to malware or phishing attacks if they are not fully knowledgeable about safety procedures.
The key to control
Non-custodial wallets empower holders of digital assets to have full control over their crypto. They firmly fit into the ethos of decentralized finance and blockchain technology which are the biggest attractions to getting into crypto. However, with this sole responsibility comes a high level of risk. Safeguarding one’s keys means that you alone are in charge of holding them, ensuring their safety, and learning how to manage potential risks quickly and effectively.
