Custodial and non-custodial wallets

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Custodial and non-custodial crypto wallets are two different types of cryptocurrency wallets that offer different levels of control and security.

Custodial wallets, also known as hosted wallets, provide storage services for cryptocurrency by a third party, usually an exchange or a payment platform. Users who use custodial wallets transfer control of their private keys and funds to the third party. This means that the third party has control over access to your assets and can perform transactions on your behalf. While this can be convenient, especially for beginners, such wallets can be less secure as you rely on the security and reliability of the third party.

Non-custodial wallets, on the other hand, offer a higher level of control and security. In this case, you have full control over your private keys and funds. Non-custodial wallets store private keys directly on your device (e.g., computer or mobile device) or on a hardware wallet. You do not transfer your keys to a third party and independently manage your assets. This provides a higher level of security, but such wallets may require more responsibility from the user, as you won't be able to recover access to your assets if you lose your private key.

Custodial crypto wallet

Custodial wallets resemble banking instruments, since the user does not have full control over his funds, since the operator (custodian) has access to a private key. On one hand, this is good: having lost passwords or keys, the user will be able to access the funds again.

When you store your cryptocurrencies on crypto exchanges (for example, such as Coinbase, Kraken, Bitfinex, Binance, Poloniex, Bittrex, Coinex, Bitstamp and so on), trading platforms and brokerage services, you "put" them in a custodial wallet.

Being custodial, these platforms can be profitable when making transactions (for example, due to the absence of commissions within the ecosystem) and effective, since in fact control of funds belongs to a third party.

Disadvantages of custodial crypto wallets

Among the main disadvantages of custodial crypto wallets are the custodian's access to your funds and the risks of their loss as a result of hacking, fork, by decision of the authorities or the court. The lack of access to your own funds during technical work may also be an unpleasant experience.

For example, in the summer of 2016, hackers withdrew almost 120 thousand bitcoins from the crypto wallets of users of the Bitfinex crypto exchange, which stored funds on a "hot" wallet. The theft of funds was not prevented by either two-factor authentication or multi-signature.

Another striking example of the shortcomings of custodial wallets was the closure of the Russian BTC-e crypto exchange. In the summer of 2017, the FBI seized its servers and assets located in the United States. Later, the platform restarted under the new name WEX and stopped working again — its customers lost access to funds.

Non-custodial crypto wallet

A non-custodial wallet is a wallet that retains the user's ability to fully control the keys and their funds. This category includes hardware, mobile, paper, desktop and web wallets.

Decimal Wallet is a non-custodial wallet. All official Decimal wallets are decentralized, that is, non-custodial (non-custodial). Seed phrases and private keys are stored strictly on the user's side, and Decimal does not have access to them in any way.

Disadvantages of non-custodial wallets

All responsibility for the safety of private data and funds on wallets lies entirely with their owners. If you lose the private key and the phrase for its recovery, the funds will be irretrievably lost.

In mid-2013, a British miner mistakenly threw a hard drive with 7.5 thousand bitcoins mined in four years into the landfill. Access to them is lost forever, and no one can change it.

Usually, users prefer to store really significant amounts on non-custodial wallets, so they are very interested in intruders. In the spring of 2018, the popular non-custodial Ethereum wallet lost 216 client ethers due to an attack on a DNS server: hackers redirected users to a phishing site and gained access to their private keys.

In addition to the aforementioned disadvantages, non-custodial wallets may have vulnerabilities in the code, be physically hacked or get lost.

Safety rules

  • Save your keys in different ways in several secure places. Experienced users recommend storing parts of keys and phrases in different locations, as there are fraudulent programs "trained" to search for passwords and phrases on your device by length and format.
  • To protect against phishing in web wallets, follow the links you have saved in bookmarks. If you enter addresses manually, it is better to do it in a new browser tab and with careful rechecking of all characters.
  • Determine what tasks you need crypto assets for, and to minimize risks, divide them into several previously independently studied crypto wallets.

Summing up

Cryptocurrencies have saved us not only from an intermediary, but also the opportunity to shift responsibility for our funds to him. From now on, only we own our "money", only we are responsible for it.

It is no less important to keep your crypto assets safe and sound than it is profitable to purchase them or earn money. With the development of technology and interest in the cryptosphere, more and more intruders are starting to hunt for users' coins, and crypto wallets are becoming one of their favorite targets.

Users may believe that their funds are safe in any crypto wallet by default, and prefer to store coins directly on the crypto exchange. But it's not safe. If you have something to lose, divide the coins into those that will be needed for quick operations (they can be left in custodial crypto wallets), and those that you are going to store (it is better to save them in non-custodial crypto wallets).

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