What is a benefit of custodial wallets?

What is a benefit of custodial wallets?

What is a benefit of custodial wallets

Buying cryptocurrencies is the trend!

And once you have bought a cryptocurrency, you should decide and be sure what to choose:

a depository or a non-custodial wallet to store your funds?

First of all, we know that blockchain app developers and business founders are very interested in how they can incorporate both into their processes to get better opportunities compared to traditional models. 

The business model that has emerged as ideal is cryptocurrency wallets. But the confusion of entrepreneurs does not end with identifying the "right" business model that perfectly combines both blockchain and cryptocurrencies. 

While many debate blockchain beyond cryptocurrencies, how to create a blockchain wallet and which cryptocurrency will become the only global currency, many others focus on choosing the right wallet according to the custody of the private key: custodial vs. non-custodial wallet comparison. Something we will talk about in detail in this article.

But before we get to the part where we compare Custodial and Non-Custodial, let us first reveal the basics of the two blockchain wallet types, starting with Custodial wallets.

What is a Custodial Wallet?

A custodial wallet is defined as a wallet where the private keys are held by a third party. This means that the third party has full control over your money, you only need to give permission to send or receive payments.

What is a non-pledgeable crypto wallet? 

It is a type of blockchain wallet where you are your own bank. This means that users have full control over their funds and the associated private key. If you want to know more about blockchain wallets, you can reed here.

Custodial Vs Non-Custodial Wallet  

1. Custodian of the private key.

The most important factor when comparing custodial and non-custodial wallets is who owns the private key.

In the case of custodial wallets, a third party manages the private key. In the case of non-custodial wallets, on the other hand, all blockchain custodial services reside with the users.

So, if you want to introduce a wallet where users can be their own bank, you should create non-custodial blockchain wallets (also known as self-custodial wallets).

2. transaction type

Another factor to consider when comparing custodial and non-custodial crypto wallets is the type of transaction. 

In Non-Custodial, the transaction is added to the chain in real time. This is not the case with the Custodial wallet. 

Here, too, it can be seen that the former has the edge.

3. security

With custodial online crypto wallets, all sensitive user data is stored in hot and cold storage, which is often cracked by data burglars. For this reason, the security level of custodial wallets is low unless the authorizing party implements strong security measures.

Custodialless crypto wallet comparison, on the other hand, keeps all the information with the users. This reduces the risk of data theft unless the user shares the data with someone or their device is stolen.

So, here again, non-custodial wins the 

4. backup and restore capability

When it comes to backup and recovery capabilities, self-custodial or non-custodial crypto wallets are behind custodial ones.

Custodial wallets keep the private key with them. So even if you lose access to the data, you can restore access by asking a third party to do so. 

However, this is not possible with non-custodial wallets, where you are the sole authority.

5. offline access

In order to access your funds and the corresponding details, you need to log into your custodial wallet and submit a request to the central authority. Therefore, an internet connection is essential.

For non-custodial wallets, there is no such requirement. This, in turn, means that non-custodial wallets are a better option to enjoy full blockchain development services in real time.

6. future opportunities

According to cryptocurrency market trends, non-custodial wallets will continue to have an advantage over custodial wallets as there are more cases of data breaches and users become more aware of their privacy and security. 

7. examples

Some of the most popular examples of the best custodial wallets are: Free Wallet, Binance, BitMex, Bitgo, Blockchain.com.

Although the above "Custodial vs Non-Custodial Wallets" comparison factors will help you choose the right blockchain wallet, we strongly recommend Non-Custodial Wallets. This is because this list of non-custodial wallets offers ample options and has a better future in the market - which in turn establishes itself as a profitable business decision.

Let us now dive into understanding Custodial vs Non-Custodial Wallets, where we will discuss the pros and cons of both crypto wallets.

What are the advantages and limitations of Custodial Wallets?

Advantages of Custodial Wallets

Free transactions

One of the biggest advantages of a custodial wallet is that, unlike other wallets, it does not charge a transaction fee. It allows customers to make transactions within the ecosystem for free. A perfect example of this is Freewallet - a custodial wallet that saved consumers around $500,000 in network fees in 2019.

No major repercussions from lost private keys

A third party manages your custodial wallet. So even if you lose your private key or forget the mnemonic, it's easy to regain access to your wallet and stored funds.

Higher backup possibility

Another advantage of custodial wallets is that the central authority that manages your wallet provides backup capabilities. This makes it easier to undo any transaction or restore a previous version.

Disadvantages of Custodial Wallets

Custodian's control over your money

The biggest disadvantage of Custodial Cryptocurrency Services is that you have no autonomy over your wallet.

The third party, i.e. the custodian, has complete control over your money and the processes related to it. It has the freedom to take actions regarding the funds, including freezing the stored amount.

Need for KYC

Another disadvantage of introducing custodial wallet to your services is that this type of wallet strictly recommends its users to perform KYC (Know Your Customer, ID Verification). Without proof of identity, you will not be able to access your funds or related services. This need for identity verification compromises the basic principle of cryptocurrency, which is anonymity.

Threat of data breaches

If you are buying cryptocurrencies for the first time, it is likely that they will end up in an online cryptocurrency exchange with a deposit function.

In the case of custodial cryptocurrency exchanges, a large amount of user funds are stored in cold and hot wallets. Even though these wallets are not easy targets for hackers due to the inclusion of various conformities, they are still vulnerable to security breaches. 

One such incident occurred in 2014 at the Japanese exchange Mt. Gox, where over 70% of Bitcoin transactions were hacked, resulting in a loss of around $450 million. 

No offline option

Last but not least, an internet connection is a must to log into custodial wallets or to perform a transaction. 

Having cleared this up, let us dive into the concept of Non-Custodial Wallets to get a crystal clear idea of both before moving on to the part where we look at the comparison between Custodial and Non-Custodial.

What are the advantages and limitations of non-custodial wallets?

Advantages of non-custodial wallets

User control over the funds. 

The main reason why non-custodials are seeing a huge uptick is that they give users individual access to their funds. Users do not have to turn to third parties to manage their funds or perform other related activities.

Security in funding

Since all the details related to your online crypto wallet and the funds it contains come from you, the risk of a data breach is much lower. This is one of the main reasons why 66.5% of crypto owners nowadays rely on non-custodial and mobile storage solutions.

Instant withdrawals

Unlike the best custodial wallets, these wallets do not require any confirmation from a third party to perform each transaction. This simplifies the entire process and makes it easier to enjoy instant withdrawals.

Having said that, let us now look at the limitations of non-custodial crypto wallets in order to make a neutral decision.

When it comes to the disadvantages of non-custodial wallets, there is nothing significant that can be highlighted. The wallet type offers the best blockchain facilities. However, to enjoy the benefits, users need to keep their keys safe.

Disadvantages of non-custodial wallets

Delay in trading

It will be difficult to trade the currency quickly as it is first sent to an exchange in non-custodial wallets.

More responsibility

Being responsible for your own security means a lot of responsibility. Even the smallest mistake can lead to robbery, deletion or unplanned consequences.

User interface

User interfaces are presented in a way that is a bit more difficult to understand.

Lost keys mean lost money

If you lose your key and seed phrase, there is no one who can help you recover your wallet or data. Losing a private key or mnemonic seed phrase can cause the user to lose access to their wallet with no way to back it up and restore it.

Frequently asked questions

Q. What is the difference between custodial and non-custodial cryptocurrency services?

The main difference between custodial and non-custodial cryptocurrency services is that in the first case the private key is managed by third parties, while in the second case it is managed by the users.

Q. How to create the best non-depository wallet 2021?

Creating a non-asset managed crypto wallet is an extensive and complicated process. Therefore, it is advisable to hire a reputable blockchain development company to develop it. 

Q. How does a custodial wallet work?

This is how custodial wallets work: A (in this case, a third party) asks B (in this case, users) to transfer their funds to a specific address/location, but A does not receive a private key for that storage address. The third party manages all the funding on the condition that users cannot make any transaction without their participation.

Q. What does "non-custodial" mean?

In general, non-custodial means that there is no custody. In this article, non-custodial in the context of blockchain wallets means a type of wallet that allows users to own their private keys, which are stored in encrypted form. Users have full control over their money.

Q. What are private keys?

Private keys are a set of private alphanumeric codes combined with a public key.

If you are looking for good advice on blockchain wallets, you can contact the experts at the blockchain app development company.

Final thought

Custodial wallet providers are popular because they have a good UI, but their number is still low because users demand more control over their crypto wallets.

The best non-custodial wallet 2021 is being adopted by more people because users have full control over the funds, but with full control comes great responsibility.

The fundamental difference between a custodial and non-custodial wallet is that in a custodial wallet, the private key is held by a third party, while in a non-custodial wallet, users are responsible and have full control over their assets.

If you are planning on adding the best non-custodial wallet to your offering in 2021, it may be a good place to start. 

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