If you currently hold cryptocurrency, you’ve probably interacted with a crypto wallet before. But a crypto wallet isn’t like a regular wallet in which you’d hold your credit cards and cash. It’s a common misconception that crypto wallets store or contain a user’s cryptocurrency holdings. In fact, they are simply the tool through which a user can access their funds on the blockchain and initiate crypto transactions.
There are different wallet types and every wallet has a corresponding public key and private key. A public key is like a bank account number, shareable with everyone. It is required for transferring money into a user’s wallet.
On the other hand, a private key is like a password with which users can access their funds or sign a crypto transaction. It is imperative to keep a private key safe.
Wallets are either custodial or non-custodial, depending on who controls or has access to private keys. But what differentiates these two wallets and how do you determine which one is most suitable for you?
What is a custodial wallet?
Custodial wallets are web-based wallets, usually provided by centralized crypto exchanges like Binance, MEXC & Bitmart. Most exchange interfaces are designed so users never even have to directly interact with their wallets. This user-friendliness means custodial wallets are generally preferred by newcomers, to whom the convenience factor of not having to manage their private key themselves is a big benefit.
What is a non-custodial wallet?
There’s an old saying in crypto, “not your keys, not your crypto”, which essentially means whoever holds a private key is the only true and verifiable owner of the funds in its corresponding wallet.
With non-custodial wallets, a crypto user has complete control over their private key, along with their funds. Non-custodial wallets tend to be a bit more technically complex than custodial wallets, so they’re generally more favored by experienced crypto users.
1. Custody of private keys
In case of Custodial wallets, the third-party exchange, eg — Binance, MEXC, etc, manage the private key. Users do not have full control over their assets.
For non-custodial crypto wallets, no third party is involved and users manage their own private keys. Thus, without interference from any kind of intermediaries, users alone can access the assets stored in their crypto wallets.
With custodial wallets, the user’s assets and other sensitive data is stored with the exchange, which is often susceptible to hackers and intruders. As was witnessed in one of the most high-profile attacks in cryptocurrency history, where Binance exchange was hacked for $570 million in October 2022.
Since non-custodial wallet users store their keys (ideally off-chain), it’s extremely difficult for hackers to steal their funds. Using a hardware wallet that functions offline can further reduce security vulnerabilities. Non-custodial crypto wallets therefore offer better security.
3. Offline accessibility
Custodial wallets require an Internet connection to reach the exchanges and access blockchain data. Thus, they can only operate online, making them vulnerable to cyber attacks.
Non-custodial wallets are more flexible because they can usually operate both online and offline. A non-custodial crypto wallet can function from a web browser or a mobile application. A hardware wallet is the safest, however, because users can sign transactions offline, thereby protecting keys from malicious hackers.
4. Asset backup and recovery
In case a user forgets his/her password, custodial wallet holders can rely on the exchange house to retrieve their password. Users can contact customer support to get their assets back.
With non-custodial wallets, however, users need to be extra careful since losing one’s private key means losing all their assets. To protect their cryptocurrency, users need to safely store their recovery phrase or seed phrase.
Deciding between a non-custodial and custodial crypto wallet type largely depends on which features in a wallet are most important to you. Custodial wallets are generally preferred by newcomers and those who value the set-and-forget nature of managing their crypto through an exchange or other centralized wallet provider. Non-custodial wallets are for those users who want to exert more control over who has access to their funds. There are pros and cons for both types of wallets, so weigh your comfort level with the features that matter most to you before deciding. (And, in case you’re wondering, Philcoin’s wallet is non-custodial which means you are the sole and rightful owner of your assets.)