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Custodial vs Non Custodial Wallet: Comprehensive Comparison

Custodial vs Non Custodial Wallet: Comprehensive Comparison

WEB development
19 min
1295
05.04.2024

The number of people and businesses paying attention to cryptocurrency trading and wondering how to do it effectively is growing every day.

Cryptocurrency wallets allow users to store and control various types of crypto assets and make transactions with them. Such capabilities are vital for working with cryptocurrencies and crypto-tokens as investment instruments.

Most crypto wallets are divided into custodial and non-custodial. Custodial wallet services are provided by cryptocurrency exchanges such as Kraken and Coinbase, wherein a third party manages your private keys and, consequently, your cryptocurrency holdings. Conversely, in a non-custodial wallet like the BitPay Wallet, only users can access their private keys, ensuring complete control over their assets. 

Both types have pros and cons, so the final choice of non custodial vs custodial wallets will depend on your requirements. This guide provides all the necessary information about crypto wallets to help you choose the right one for development.

Custodial vs non custodial wallet: key differences

Thanks to the widespread use of blockchain technologies, cryptocurrencies have become an essential part of the ecosystem of blockchain solutions. Statista estimates that the cryptocurrency market's user base is projected to amount to 992.50 million by 2028. This means that the demand for using crypto wallets will increase.

Crypto wallets are digital tools designed to manage, store, and facilitate cryptocurrency transactions. These wallets operate by storing pairs of cryptographic keys: a public key for obtaining funds and a private key for authorizing transactions and accessing holdings. These keys essentially serve as the user's digital signature, enabling them to interact securely within the blockchain network.

In the realm of crypto wallets, there is a fundamental difference between custodial and non custodial wallet. Each of the variants offers unique features and functionalities tailored to different user preferences and needs. Let's delve into the core disparities between these two types:

FeaturesCustodial walletsNon-custodial wallets
Management of private keysA third party (or custodian) owns private keys and access to all funds of usersUsers obtain all control of funds and keys
User experienceMore user-friendly than non-custodial and don’t need deep knowledge of blockchainLess user-friendly and more suited for skilled crypto users
SecurityKeys and funds are stored online. So, their safety depends on the security mechanisms of a custodianUsers can determine how to secure their private keys
Recovery capabilitiesUsually, it is possible to recover access to funds when the user loses the password to their walletIf users lose their seed phrase, they lose access to their crypto savings
Offline accessibilityPrivate keys are only accessed onlinePrivate keys and wallets can be managed offline
Cost of transactionsUsually higherUsually lower
ExamplesBinance, Coinbase, Kraken, GeminiTrustWallet, MetaMask, Trezor, Ledger

Each type has its own advantages and disadvantages, and the optimal choice may vary depending on your specific needs. Let’s start our research with the custodial wallet meaning. 

Custodial wallets: overview

It is a type of wallet where the holder’s private keys are stored by a third party. The owner of a custodial wallet can send and receive payments but cannot manage the wallet keys.

Crypto exchanges and other decentralized finance (DeFi) companies often use custodial crypto wallets. A third party (such as an exchange) manages such a wallet and is responsible for executing transactions and securely storing keys and funds. In this case, the advantage for the holder is ease of access—to enter the wallet, you only need to enter one key.

Pros and cons of custodial wallets

Custodial wallets, provided by platforms like cryptocurrency exchanges, offer convenience and user-friendliness, but they also come with their own set of advantages and disadvantages.

Benefits

  • Ease of use: A custodial crypto wallet eliminates the need for users to manage and secure their private keys, making them suitable for beginners or those who find handling cryptographic keys complex.
  • Enhanced security measures: Custodial services usually introduce robust security protocols, such as encryption and multi-factor authentication, to protect individuals’ assets. This can instill confidence in users regarding the safety of their funds.
  • Customer support: Most custodial wallet providers have customer support channels, allowing users to seek assistance with any queries or problems they face. This support can be invaluable, particularly for novice users navigating the cryptocurrency landscape.
  • Fund recoverability: In scenarios involving the loss of private keys or other complications, custodial wallets often implement procedures to assist in recovering users' funds. Since a third-party service oversees these wallets, the service provider manages private keys. Should a user encounter difficulties accessing their crypto wallet, reaching out to the provider's customer support team enables them to seek assistance in fund recovery. 

Drawbacks

  • Limited control: Custodial wallets entail relinquishing control of private keys to the service provider, undermining cryptocurrencies' decentralized nature. Users should trust the third-party provider to manage their funds securely.
  • Security vulnerabilities: Despite implementing security measures, custodial services remain susceptible to hacking and breaches. In the event of a security breach, users' holdings could be compromised or lost.
  • Dependency on the provider: Users rely on the custodial service's uptime and availability to access their funds and execute transactions. Any downtime or operational issues on the platform could impede users' ability to manage their assets.
  • Regulatory compliance: Custodial wallet providers must adhere to regulatory requirements, including KYC (know-your-customer) and AML (anti-money laundering) regulations. This may involve collecting users' personal information, potentially compromising their privacy.

A cryptocurrency custodian wallet offers convenience and security features. However, users must carefully think before entrusting their holdings to a third-party service provider. Users should weigh factors such as control, security, and regulatory compliance. 

Notable examples

Binance
It is a well-known global cryptocurrency exchange. This platform was created in 2017, grew rapidly, and quickly became the biggest crypto exchange in the world before Coinbase went ahead. In addition, Binance is one of the highest-rated exchanges in terms of rates, has a high-security rating, and has super low fees. Binance offers users a reliable custodial wallet crypto solution.

Kraken
Although this platform may not be as popular as other Binance, this custodial wallet crypto exchange has maintained a strong reputation in the industry. Kraken provides support in over 190 countries, has over 9 million active users, and has a quarterly trading volume of US$207 billion. Kraken is a good option for users looking for a reliable custodial wallet.

Gemini
Established by cryptocurrency investment pioneers Cameron and Tyler Winklevoss, Gemini is a dual-purpose platform, serving as both a cryptocurrency exchange and a cryptocurrency custodian wallet. The platform proudly boasts SOC1 (system and organization controls) Type 2 and SOC 2 Type 2 certifications, ensuring adherence to stringent security and operational standards.

Gemini provides users with an intuitive and secure interface. This crypto platform offers a wide array of trading options and presents opportunities for users to earn profit on their stored digital holdings.

Non-custodial wallets: overview

In this section, we will observe a non custodial wallet meaning. It is a wallet whose holder has full access to his funds and is also personally responsible for their safety. The owner himself manages the crypto keys and processes transactions.

Most often, a non-custodial wallet is also provided by a third party. However, the management of assets in such a wallet is carried out personally by their holder. The same refers to ensuring the safety of funds on such a wallet. The user himself stores public and private keys and enters them during each transaction. Because of this, non-custodial wallets tend to be more difficult to use.

There are several types of non-custodial wallets with varying levels of tech knowledge to use them:

  • Browser- and app-based wallets: These software solutions are connected to the Internet 24/7, which makes the wallet more vulnerable to hackers and various scammers.
  • Hardware or physical wallets: They are considered the most reliable. The key is not stored on the network but on the device itself, so it is almost impossible to hack.

The most significant advantage of a non-custodial wallet, reliability, is also its biggest disadvantage. Having lost the key, the user loses access to the wallet and everything that is in it. No one is there to offer support. The user is face-to-face with the wallet and all the nuances that arise.

Pros and cons of non-custodial wallets

Non-custodial wallets, such as software or hardware wallets, offer individuals greater control and autonomy over their crypto holdings. However, they also present distinct pros and disadvantages.

Benefits

  • Enhanced control: Non-custodial wallets provide users with sole control over their private keys, empowering them to manage and safeguard their funds independently. This decentralized approach meets the key principles of blockchain technology, promoting self-sovereignty.
  • Increased security: Since users retain possession of their private keys, non-custodial wallets lower the risk of funds being compromised by some threats, such as insider attacks. To enhance the security of the wallets, users can be provided with additional security measures, such as encryption and passphrase protection.
  • Privacy protection: Non-custodial wallets offer greater privacy by minimizing the disclosure of personal information to third parties. Users can transact pseudonymously, preserving their anonymity and privacy rights.
  • Extensive cryptocurrency variety: Non-custodial wallets often offer a wider array of cryptocurrencies, expanding users' investment opportunities. This variety empowers users to explore diverse cryptocurrency options, facilitating portfolio diversification and risk mitigation.

Drawbacks

  • Complexity: Non-custodial wallets require users to take responsibility for managing their private keys and ensuring the security of their wallet software or hardware. This may pose challenges for inexperienced users or those unfamiliar with cryptographic concepts.
  • Risk of loss: Since users are solely responsible for safeguarding their private keys, any loss or theft of these keys could result in irreversible loss of funds. This risk underscores the necessity of applying robust security practices, such as securely storing backup copies of private keys.
  • Lack of user support: Unlike custodial wallets, these wallet providers typically offer limited customer support options. Users may encounter difficulties or technical issues with their wallets and struggle to find timely assistance or resolution.
  • Recovery challenges: In the case of hardware failure or wallet loss, recovering access to funds stored in a non-custodial wallet can be challenging. Users must follow strict backup procedures and ensure they retain access to their recovery phrases or seed phrases.

In general, while non-custodial wallets offer users greater control and privacy over their cryptocurrency holdings, they require careful management and diligence to mitigate risks effectively. Users should weigh the pros and disadvantages of non-custodial wallets against their individual preferences and risk tolerance levels.

Notable examples

Let’s consider some famous examples of non-custodial wallets. The numbers of their users are really impressive.

MetaMask
According to CoinGecko, the non-custodial wallet MetaMask from ConsenSys is the most popular in its segment in 2023. The aggregator reports that the crypto wallet's downloads exceeded 22 million in 2023, and the monthly number of active users is about 30 million.

MetaMask supports cryptocurrencies based on Ethereum, BNB Chain, and a number of other networks. The application allows you to interact with 17,000 decentralized applications. The wallet is available for Android and iOS devices. There are also extensions for Google Chrome, Firefox, Brave, and Microsoft Edge browsers.

TrustWallet
This is another non custodial wallet example. Also trusted in the community is the non-custodial multi-wallet Trust Wallet, which belongs to Binance.

According to the team, from 2016 to 2023, the number of product downloads exceeded 70 million. The wallet supports tokens on more than 100 blockchains. The application works on iOS and Android. Extensions are also available for Google Chrome, Brave, Opera, and Edge.

MyEtherWallet (MEW)
This solution stands out as a seasoned, non-custodial Ethereum wallet that has withstood the trials of time. Initially launched as a web-based platform, MEW now provides a mobile application, catering to users seeking convenient asset management on the move. With its capability to handle Ethereum, ERC-20 tokens, and ERC-721 collectibles, MEW enables users to securely store, transfer, and receive their digital assets.

What distinguishes MEW from its counterparts is its support for cross-chain swaps. Within the wallet interface, users can seamlessly exchange Ethereum for other cryptocurrencies such as Bitcoin, Litecoin, and Dogecoin. Furthermore, MEW extends its support to Ethereum Classic (ETC), the BNB Chain, Polygon, and various other networks, offering versatility to users with diverse crypto portfolios.

The best company for crypto wallet development

So, you decided on the dilemma of non custodial vs custodial wallets and chose the type. Now, it is time for the implementation of the project. The development of crypto wallets is carried out by companies that specialize in the development of blockchain solutions. But how do you choose the right company?

Before selecting a firm to create a crypto wallet, be it a custodial wallet vs non custodial wallte, it is vital to read reviews about the companies. Feedback from customers who have already used the agency's services or are regular clients will help you define how similar the creation team's approach to work is to your own. By reading the reviews, you can determine if it meets your expectations. 

In addition, portfolios and individual cases will help you understand whether you like the products the company has worked on. A portfolio of real work also helps weed out scammers.

You should also ensure that you are satisfied with the team's composition. If you have specific requirements for your team, you should discuss with the development company whether they can meet them. Understanding the development stack used to determine whether a certain solution is right for you is also essential.

If you are searching for a blockchain wallet creation firm, Peiko can help. We have extensive experience in blockchain technologies, cryptocurrencies, wallet development, and related areas. Offering top-level blockchain development services, Peiko’s experts have a profound understanding of the fundamental principles and concepts behind this technology.

The Bitcoin Additional is one of our best crypto wallet projects, which Peiko developed. This cryptocurrency non-custodial wallet is much like a deposit: users store funds on a specific platform and take advantage of additional services provided by the custodian (the custodian of their funds). For example, they can send and obtain Bitcoin and other different cryptocurrencies with ease.

This project involved developing a secure and user-friendly crypto wallet application explicitly designed for tablets. Here's a breakdown of the critical features we implemented:

  • Enhanced security: Understanding the critical nature of security for financial technology products, we prioritized robust security measures throughout the development process. Our experts established a system for continuous monitoring of the application's source code to identify and address any security risks proactively.
  • Trading easily: Users can effortlessly send and receive various cryptocurrencies directly through the app, facilitating convenient fund management.
  • QR code generation: The app generates a QR code of the user's wallet address for simplified transactions. Bitcoin Additional allows for quick and secure transfers when scanned by other users.
  • Shake-to-Pay functionality: This fun and intuitive feature allows users to find and send crypto to designated contacts simply by shaking their tablets.
  • Contact syncing with the invitation system: The app integrates seamlessly with the user's contact book. This enables easy identification and invitation of friends and family to join the crypto ecosystem.
  • Tablet-optimized design: The application boasts a clean and intuitive interface tailored for the larger screen of tablets, ensuring a seamless user experience.

As a result, the client got a secure and convenient crypto wallet. It provides the best user experience by combining a user-friendly design with robust security measures. There are many active users of this solution now. We are eager to help you develop your project, whether a custodial crypto wallet or a non-custodial one.

Future of crypto wallets

Looking ahead, there will be a persistent drive towards enhancing the user experience of a custodial and non custodial wallet. This entails refining interfaces to be more intuitive and user-friendly, along with incorporating additional features and services. One notable trend is the evolution of cryptocurrency wallets into super apps, offering a plethora of services beyond mere crypto funds management and storage. For instance, some wallets are integrating with decentralized exchanges, enabling seamless cryptocurrency trading within the wallet interface.

Another imminent trend is integrating social features into crypto wallets, such as messaging and community-building functionalities. This integration aims to foster a sense of community among users and boost engagement with the technology. Imagine wallets that not only simplify financial transactions but also allow individuals to communicate and easily share wallet addresses with contacts. Perhaps these wallets enable users to form the basis of new social networks based on blockchain technology.

Moreover, there will be ongoing innovation in the realm of hardware wallets. These wallets offer increased security by storing private keys offline, thus reducing vulnerability to hacking. However, current hardware wallets can be challenging to use and require technical knowledge. In the future, we expect the creation of more user-friendly hardware wallets accessible to a wider audience.

In sum, the future of crypto wallets holds immense promise. As the cryptocurrency field grows, the demand for secure and user-friendly wallet solutions will rise. By tackling industry challenges and embracing emerging trends, we can pave the way for a future where crypto wallets are accessible to all and play a pivotal role in cryptocurrency adoption.

Conclusion

So, which wallet is better to choose for development, a custodial wallet vs non custodial one? Most users use both types of wallets depending on their specific needs. Users prefer a non-custodial wallet to have complete ownership over assets and apply blockchain technology to interact with the DeFi apps. Still, many seek a service provider to store assets while users trade or invest. In this case, people choose a reliable custodian.

Remember that no matter the type of wallet, you must always use reliable methods to protect people's funds to ensure that users do not abandon the solution.

If you are searching for a credible blockchain development service provider, contact Peiko. We are eager to discuss your idea and create a top crypto wallet that fits your needs.

FAQ
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