What is the difference between custodial and non-custodial wallets?
Last updated
Last updated
Ever wondered how and where your cryptocurrencies are stored? There are many different types of cryptocurrency wallets that token holders can use to store cryptocurrencies. Cryptocurrency wallets can generally be broken down into two broad categories: custodial and non-custodial. the
Custody wallet (such as Binance Custody) is a service that holds the private key of the user's wallet and escrows the assets. A regular Binance account is also a type of custodial wallet. In contrast, with a non-custodial wallet, the user will have full control over their assets. Both MetaMask and Binance Chain Wallet are typical non-custodial wallets.
There are pros and cons to both custodial and non-custodial wallets. Next, we will explain the differences between the two so that you can understand when these two types of wallets are suitable for each situation.
If you've used Bitcoin or other cryptocurrencies, you know the importance of a digital wallet. Completing a transaction, transacting on a cryptocurrency exchange, or using a blockchain application requires a digital wallet. Therefore, it is imperative that you understand how cryptocurrency wallets work and the main differences between non-custodial and custodial wallet providers.
A cryptocurrency wallet is a tool for interacting with a blockchain network. Besides that, you can use it to send and receive cryptocurrencies or access decentralized applications ().
Technically speaking, cryptocurrency wallets do not actually store digital assets. Instead, they generate the information needed to use cryptocurrencies. Even so, for beginners to get started, most users still use the verb "storage", and this article will continue to use this term. the
Also, a cryptocurrency wallet consists of two main components - a public key and a private key.
If someone wants to send you cryptocurrency, they can do so through the address generated by your wallet's . At this point, your wallet address and public key can be shared with others (hence the name "public key").
Instead, a private key is a cryptographic secret whose role is to sign transactions and provide access to funds. You can access your cryptocurrency from any device as long as your private key is safe.
While cryptocurrencies are digital products, crypto wallets that hold private and public keys come in all shapes and sizes—keys can be printed on a piece of paper, accessed through desktop wallet software, or stored offline on a hardware wallet device.
Some wallets can also store and transfer , non-fungible tokens issued in the blockchain.
Whatever your choice, you can't go beyond a custodial or non-custodial cryptocurrency wallet.
As the name suggests, a custodial cryptocurrency wallet is a wallet that hosts your assets for you. This means that a third party holds and keeps the private key on your behalf. In other words, you do not have full control over your funds, nor can you sign transactions. Using a hosted cryptocurrency wallet service is not necessarily a bad thing.
In the initial development stage of Bitcoin, all users must create and keep their own wallets and private keys. While there are many benefits to being your own personal bank, it can be difficult and even risky for inexperienced users. If your private key is stolen or lost, you will have permanent access to your crypto assets. Blockchain analysis reports indicate that more than 3 million BTC may be lost forever.
Other cryptocurrencies cannot retrieve inheritance rights because only the original cryptocurrency owner holds the private key. You can avoid such incidents by sharing access to assets with custodians.
Even if you accidentally forget the password of the cryptocurrency trading platform, you can still contact customer service to retrieve your account and assets. If you use a non-custodial wallet, you must keep your cryptocurrencies safe.
Therefore, custodial wallet services are more suitable for most users. However, this means that your private keys are entrusted to a third party in escrow. Therefore, it is very important to choose a reliable trading platform or service provider.
When researching hosting providers, you need to consider the following: whether they are regulated, the type of services offered, how private keys are stored, and whether they offer insurance.
A non-custodial cryptocurrency wallet means that only the holder controls the private keys. This type of wallet is suitable for users who want complete control over their funds. You can trade cryptocurrencies directly from your wallet without the intervention of intermediaries. This is a good option for experienced traders and investors who know how to keep and protect private keys and seed phrases.
Managed service
Unmanaged service
Private Key
Third Party Ownership
Wallet Holder Ownership
accessibility
registered account
open to everyone
transaction costs
usually higher
usually lower
safety
usually lower
usually higher
support
usually higher
usually lower
Yes
No
As mentioned earlier, the main disadvantage of custodial wallets is that funds and private keys must be entrusted to a third party. In most cases, these service providers require identity verification (KYC). Its advantages are safety and ease of use. You don't need to worry about losing your private key, and you can contact customer service in case of trouble.
When using hosting services, it is important to choose a quality company that offers insurance and trustworthy security. Also look for a custodian that is regulated and compliant.
Non-custodial wallets are free from third-party supervision, allowing users to fully control keys and funds. In other words, asset ownership is in your hands and you can act as your own personal bank. Additionally, non-custodial transactions tend to be faster without waiting for withdrawals to be approved. Finally, if there is no escrow party, no additional escrow fees will be incurred. Depending on the service provider chosen, this can be very expensive.
As we all know, non-custodial wallets lack accessibility and ease of use. Such wallets are often cumbersome to operate and often cause problems for first-time cryptocurrency holders. As unmanaged service providers continue to evolve, this issue should be resolved.
Of course, you also take full responsibility for your keys, and take precautions when handling them. This means, rather than entrusting your funds to others, trust yourself.
Use strong passwords.
Enable two-factor authentication (2FA) for added protection. the
Great care must be taken when clicking on links and downloading new software.
Both types of wallets are suitable for storing crypto assets, including NFTs. Most traders and investors will choose flexibly according to different situations. However, the chosen wallet must support the cryptocurrency one wishes to store. Their storage methods may be different.
Different blockchain networks run various different types of cryptocurrencies. We can classify these types by token standard, however, multiple blockchains with different standards can run the same token. For example, you can find BEP-20 type BNB on Binance Smart Chain, and BEP-2 tokens on Binance Beacon Chain.
The following are the most common token standards:
Binance Smart Chain: BEP-20, BEP-721, BEP-1155
BNB beacon chain: BEP-2
Ethereum: ERC-20, ERC-721, ERC-1155
Solana: SPL
The major wallets will continue to upgrade according to user needs, and the supported currencies will continue to increase. For example, Binance Custody currently supports BTC, ETH, BCH, LTC, BUSD, BNB, CAKE, and many other ERC-20 tokens. Binance Custody will gradually include more types of tokens to meet user needs.
Remember, whether you use a custodial or non-custodial wallet, you should always be careful and use the best approach to secure your funds.
For example, is regulated and compliant, offering standard insurance for businesses’ Binance accounts. It also offers crime coverage and other bespoke coverages upon request. Binance Custody also uses multi-signature wallets (), a protocol that requires all parties to approve cryptocurrency transactions before they can be executed, eliminating centralization risks.
When interacting with a decentralized exchange () or decentralized application (), you need to use a custodial wallet. Uniswap, SushiSwap, PancakeSwap, and QuickSwa are typical decentralized exchanges that require non-custodial wallets.
and are typical non-custodial wallet service providers. After using such a wallet, you are responsible for the security of your mnemonic phrase and private key.
requirements
Some cryptocurrency custodians also have other requirements that you may not be able to meet. For example, Binance Custody is a custody service provider that is currently only available to corporate users.Read the to learn more.
In order to and keep yourself safe from hackers, you should consider the following security measures:
Be wary of and attacks.
MetaMask, Trust Wallet and are non-custodial wallets that accept the most common and popular crypto assets. If you are not sure which coins your wallet supports, please read their official FAQ or documentation for details.
Choose a custodial or non-custodial wallet? Most cryptocurrency users use both wallets, but it all depends on individual needs. If you want full control over your assets, or just want to use blockchain technology to interact with applications, you should consider using a non-custodial wallet. Conversely, if you are looking for a service provider that can meet your storage needs while trading or investing, look to trusted custodial wallet service providers. the