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Custodial vs. non-custodial wallets: What’s the difference?

If you are a cryptocurrency holder or investor, then you are definitely using a crypto wallet. There are several different types of crypto wallets but the boldest ones among them are custodial wallets and non-custodial wallets. In this article we will tell you all the details about custodial and noon-custodial wallets and which one you should use for your crypto related purposes.

Custodial vs. non-custodial wallets: What’s the difference?
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Once you buy a crypto asset, you must decide whether to use a custodial vs. non-custodial wallet to store your funds. Before we jump into the differences between these two common types of crypto wallets, we must introduce you to the term “private key”. A private key is a secret number that is used with crypto wallets and is similar to a password for any normal other wallets, accounts or even a safe. Now let’s see how these terms are related and what the differences are. 

What is a custodial wallet?

As mentioned before, private keys for crypto wallets are like passwords for accounts. Now a custodial wallet is one in which the private keys are held by a third party. This third party, which is normally a crypto exchange, has control over your funds while you give them permission to send or receive payments. 

Custodial wallets are mostly welcomed by crypto beginners because of their convenience and user-friendliness. Usinga custodial crypto wallet, you never need to directly interact with your wallets. In a custodial wallet, a forgotten password does not mean losing funds and not being able to retrieve or recover it. 

Since exchangers are known to be holders of the private key, it is important that you choose a platform which you fully trust in order not to be scammed or a victim of cybersecurity attacks. 

What is a non-custodial wallet?

As you may have already guessed correctly, a non-custodial wallet is  one in which you are the holder of your private key and have full control over your funds and initiated transactions. As the name suggests, non-custodial wallets are a bit more complex in terms of use and thus favored by crypto experts rather than newcomers. 

There are two types of non-custodial wallets, software and hardware wallets. Software wallets are those which hold private keys on a computer hard drive, while a hardware wallet is basically a USB thumb drive. Non-custodial hardware wallets are impossible to hack since they use the private key to initiate the transaction within themselves and only send it to the blockchain to be confirmed once it’s back online. 

Custodial vs. non-custodial wallets

Here are four of the most notable differences between a custodial and a non-custodial crypto wallet: 

1. Custody of the private key

This is the first and foremost difference between custodial and non-custodial crypto wallets. As mentioned before in a custodial crypto wallet, the private key is owned by a third party like crypto exchanges, whereas, in a non-custodial crypto wallet you (or the user) is the owner of the private key. Some say that those with custodial crypto wallets do not actually own any crypto assets.

2. Security

With a custodial crypto wallet, your private key is owned by a third party and your data is stored online. Thus, they are more exposed to phishing and cybersecurity attacks unless your platform provides you with extra layers of security. However, in a non-custodial wallet, your data does not go online except for when it wants to send it to the blockchain for confirmation. This reduces the risk of data being stolen, unless the user shares the details with someone, or their device gets stolen.

3. Offline accessibility

In order to access your funds in a custodial crypto wallet, having an internet connection is a must, since you need to login the exchange and enter your information to have access to your funds. Nonetheless, with a non-custodial crypto wallet, your data and private key are stored offline, so you won’t be needing an internet connection to access your funds. 

4. Possibility of backup and recovery 

If someone who uses a custodial wallet loses their private key, they are able to regain it by asking the third party. However, if you are the sole proprietor of your wallet, meaning you have a non-custodial wallet, you are not able to retrieve it if you lose it by any chance.

Comparison table 

  Custodial wallet  Non-custodial wallet 

Custody of the private key

third party the user

Security

low high

Offline accessibility

X

Possibility of backup and recovery 

X

Which one should I choose?

Deciding between a custodial and noncustodial wallet is mostly a matter of taste, but you need to weigh and see which of the features mentioned above come to you as a priority. As already mentioned, custodial wallets are favored by newcomers and those who care about convenience more than anything else. Non-custodial wallets are good for those who want full control over their funds and information.There are also other factors to be considered like the possibility of staking, cashback rewards and the variety of coins supported.

PayPax is a good example of a custodial wallet that provides you with an extra layer of security to compete and even appear better than a non-custodial wallet. Plus, the variety of supported coins on PayPax will give you a seamless experience with your crypto conversions. Sign up on PayPax now and enjoy a world of endless opportunities. 





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