Discussions about which type of wallet you should choose to store your cryptocurrencies and debates on ‘Custodial vs Non-custodial wallets’ are both hot topics in the cryptocurrency community. In this article with Tonraffles, let’s take a closer look at Custodial and Non-custodial wallets to understand all their advantages and disadvantages.
Table of Contents
What are Non-custodial and Custodial wallets ?
Non-custodial wallet: This is a type of decentralized wallet where the client owns the private keys of the wallet. Users receive a file containing the private key (passphrase) and need to write down a memorable phrase that they can use to recover their funds. Having your own private key means you have full control over your funds. Sounds good, right? But remember, having full control over your money also means you are the only one responsible for it.
On the other hand, a Custodial wallet is a type of wallet where the exchange holds the customer’s private keys and only gives you the public key (wallet address – what you often use to transfer coins to each other). They keep users’ private keys secure and undisclosed to you or anyone else. Why do they do that? Is it to control your money?
In fact, regulatory agencies try to provide users with the most convenient way to store cryptocurrencies. Some storage wallets seek safe and customer-friendly solutions, potentially allowing them to access their assets with just the click of a button. And there are some features specific to Custodial that might give them an advantage over non-custodial wallets.”
Custodial Wallets (Wallets where you do not hold the private key)
Non-Custodial Wallets (Wallets where you hold the private key)
- MetaMask
- Trust Wallet
- TON Wallet
- Coinbase Wallet
- Phantom Wallet
These classifications illustrate the fundamental difference in how each type of wallet manages the security and control of private keys, which are crucial for accessing and transacting cryptocurrencies.
Benefits of Custodial Wallets
- Loss of Private Key or Passphrase Does Not Mean Loss of Funds: Many people do not fully understand blockchain technology, and even an experienced cryptocurrency enthusiast can forget a mnemonic phrase or lose their private keys. You might have heard the story about someone who lost a hardware wallet containing 7,500 Bitcoins. With a custodial service, you won’t have to deal with anything like that, even if you lose your phone or your laptop breaks down. Your money can still be recovered if you accidentally damage your phone or forget your password.
- Easy Recovery of Wallet Access: You do not need to worry about a mnemonic phrase. Your account is backed up by the company and can be retrieved via your email, just like any other service.
To put it simply, the exchange already holds your private key. If you forget your password, 2FA, email, etc., you can still contact the exchange and provide proofs such as your coin deposit and withdrawal history, personal ID, etc. They will restore your access to the wallet. Your coins remain intact.
Fees and Instant Transactions
Every time you make a transaction on the blockchain, you need to pay a processing fee. The more you pay in fees, the faster the transaction will be executed. Some custodial wallets allow their customers to make free transactions within their ecosystem. For example, Freewallet users can make instant transactions with other Freewallet users completely free of charge thanks to sidechain technology.
Back in 2018, we conducted a study that showed our clients saved over $500,000 in network fees. This included $400,000 in XMR transactions, $63,000 in Bitcoin, and $60,000 in Ethereum. Have you ever added up how much you have paid in transaction fees?”
This means that when sending within the exchange, there is no cost or the cost is very minimal.
Regulatory bodies can assist you in case of confusion
We know that blockchain technology isn’t rocket science, but sometimes a simple mistake can cause big trouble. Did you accidentally forget to add a memo or record to your XMR transaction and haven’t received your funds yet? Or did you confuse BTC with USDT and your money got stuck in the blockchain? No worries, we can retrieve your funds.
Of course, we are not ‘wizards’ who can make anything happen with a flick of the wrist. It always involves time, effort, and resources. Moreover, not every transaction can be retrieved. Below is a list of errors that we can address. If you have any doubts and want to double-check, you can always drop us a line.
Simply put: If you accidentally send ETH to an ETC wallet, the technicians at the exchange can still retrieve the misplaced ETH and return it to you.
Custodial Wallet: Is it safe ?
And what about security? Protecting users’ cryptocurrency from hackers is a critical issue for every wallet provider. To ensure maximum safety for your funds, you can set up a PIN, 2FA, transaction limits, and multisig verification.
- Your PIN will protect your money from intruders.
- 2FA prevents hackers from accessing your account from another device.
- Transaction limits will not allow anyone to withdraw all your money at once.
- Multisig verification will send a verification message to three registered emails to execute a transaction. Funds will only be sent after confirmation from all addresses.
- Additionally, most of the funds are stored in an offline cold wallet that hackers cannot access.
All these measures prevent hackers and keep your assets safe and secure.”
Above are the advantages of using a Custodial Wallet (exchange wallet). Another advantage is that you generally don’t have to worry about losing money even if a major exchange is hacked. They will use hedge funds or insurance funds to compensate for these losses. Of course, only major exchanges are able to do this.
