In the world of crypto, there are many types of wallets out there to hold your different crypto assets. It can be hard to keep track of all of them, so today I wanted to talk about two different types of wallets you might want to consider if you’re looking into NFTs (non-fungible tokens).
An often-discussed topic in the crypto space is the difference between custodial and non-custodial wallet models, particularly when it comes to non-fungible tokens (NFTs).
If you’re not sure what that means or if you simply want to read some expert opinions on this debate, then this article will help you clarify your questions. In this article, I’ll talk about What’s the difference between custodial and non-custodial NFT wallet?
What is a custodial wallet
A custodial wallet is one where a third party holds your cryptocurrency on your behalf. In most cases, exchanges or other trading platforms provide these types of wallets, but it’s important to understand that in doing so, they also have control over them.
A custodial wallet is any type of wallet where you don’t hold your private keys. Whether it’s an online service or a third party product, all funds are controlled by someone other than yourself—in most cases, that someone is the company or individual providing services around blockchain technology.
As mentioned earlier, using a non-custodial wallet requires users to keep their devices safe and secure in order to prevent any loss of funds.
Custodial platforms maintain full custody of user funds at all times—including during transactions—which means you don’t technically own anything while it remains in their system.
What is Non-Custodial Wallet
Non-Custodial or Decentralized crypto wallets are a hot topic in today’s modern crypto world. Recently, there has been a lot of controversy around centralized exchanges, which have proven to be unreliable for users.
Decentralized exchanges give users complete control over their cryptocurrencies by not holding onto personal information or funds. The wallet generates all transactions on its own, giving complete power back to users.
While decentralized wallets can still experience server issues, these cases tend to be rare because they aren’t being monitored as much as conventional wallets are, therefore making it less likely for things to go wrong with your account.
Custodial Vs Non-Custodial Wallet
Custodial Wallet – Custodial wallet is a cryptocurrency wallet where your private key gets stored by a third party, who can operate it on your behalf. This means that users don’t have full control over their own funds.
Non-Custodial Wallet – Non-Custodial wallet is also known as custody-free wallet. It enables holders to access their funds without leaving them at risk of being hacked or stolen.
In addition, as a holder you get all rights to use your funds without any obligations towards anyone else. Holding cryptocurrencies in custody free wallets puts more power into hands of users rather than banks or institutions which are looked after by traditional financial services providers.
Thus, there isn’t any central authority governing these wallets. A number of crypto exchanges provide non-custodial wallets for their customers while they keep only limited amount of user funds in hot storage. The rest of user balances remains under control of users themselves until they decide to withdraw it back to exchange platform.
Benefits And Limitations Of Custodial Wallets?
Benefits
The benefits of a custodial wallet service can include safety and simplicity. A third party will ensure that you don’t lose your tokens by putting them on a contract yourself, and they’ll take care of technical details for you.
The downside is that all transactions go through their servers, which means slower processing times (even if it’s just microseconds), fewer privacy controls, and access to your funds from their own side. Third-party risk also goes up with each additional layer of access; if a single developer has access to funds on both sides of a smart contract, malicious code could be added to change things in nefarious ways.
In addition, as more people use one centralized wallet provider, there are greater attack vectors for hackers looking to steal user information or assets.
This makes it harder to secure your funds than with a non-custodial wallet, where only you have control over your private keys. It’s important to consider what level of convenience and security you want when choosing an Ethereum wallet—and remember that convenience isn’t free!
Limitation
Non-custodial wallets are not controlled by a third party, meaning they can never be shut down by authorities or disappear without warning.
All private keys are stored locally on your device, meaning that you maintain complete control over your funds at all times. Many people say that investing in a digital asset is more secure with a non-custodial wallet since you can access your private keys yourself.
However, there are some limitations to consider when choosing a non-custodial wallet. The biggest limitation of these types of wallets is that they’re only compatible with specific blockchains.
In other words, if you have an ERC20 token like OmiseGo (OMG), it won’t work with a Bitcoin (BTC) wallet. You’ll need to find an ERC20 BTC wallet instead.
The biggest drawback to using a custodial wallet is that it requires a substantial amount of trust in your wallet provider.
When you store your cryptoassets on an exchange, there’s always a chance that something bad could happen, such as getting hacked or having funds misappropriated by an unscrupulous employee.
If you’re using a centralized wallet, it’s impossible to guarantee that nothing will ever go wrong with your holdings.
Additionally, exchanges are required to keep records of every transaction conducted on their platforms, which can be accessed by government officials and is vulnerable to hacks and leaks (just look at what happened with Mt Gox).
This isn’t ideal for anyone who wants complete control over their funds—and most users do want complete control over their digital assets.
Benefits And Limitations Of Non-Custodial Wallets?
Benefits
Non-custodial cryptocurrency wallets are becoming increasingly popular, but why? Compared to a custodial wallet, they provide more security.
The coins you own in your wallet are stored on your device; they aren’t held by anyone else, not even an exchange.
You also get complete control over your private keys which means that you’re completely responsible for how securely you store them. Because of these benefits, many experts predict that 2019 will be the year of non-custodial crypto storage.
It may seem like an easy choice to opt for a non-custodial wallet over its custodial counterpart, but it’s not quite as simple as it seems. There are plenty of factors to consider before making such a decision.
Limitation
By using a non-custodial wallet, you are giving up control of your keys. You have to trust that your private key is never compromised and you’re also trusting that no one can access any other digital assets linked to your address.
If a hacker were able to take control of your private key, they could theoretically transfer any funds out of your wallet. Even if they didn’t do that, having someone else hold onto your private key means you don’t control how much money goes in or out of it.
Someone else is doing that for you. This means that if you want to use your crypto as cash, or pay for something with it, you need to move it from your wallet into an exchange where there is liquidity. It also makes things like paying taxes a little more complicated because tax agencies will want to see proof of what was sent out of your account and when.
This may not be too big of an issue now but as crypto becomes more mainstream there will likely be some kind of regulation around these kinds of transactions which will make them even more difficult than they already are today.
FAQs :
Is the Binance wallet a custodial wallet?
No, Binance is not a custodial wallet. Binance does not hold your assets, nor does it have access to them. You remain in control of your funds at all times. What makes us different from other major exchanges is that you can take advantage of our decentralized exchange, where you trade directly from your wallet on our blockchain.
Best non-custodial wallet
Metamask is one of the best non custodial wallet for ethereum tokens. It is a Google Chrome plug in that allows anyone to access dapps without running a full node.
It stores the private key locally on the computer. so it does not hold any users’ funds. Coinbase Commerce: Coinbase Commerce is an ERC20 token wallet built on Coinbase’s infrastructure, that enables merchants to accept any ERC20 token as payment directly into a user-controlled wallet address.
Non-custodial wallet example
Let’s say you have an ERC721 (non-fungible token) that represents a digital collectible. You would like to make it available on different platforms, so you create a set of smart contracts to act as your wallet. The wallet holds each token individually, meaning that if someone wanted to trade your token for another one, they’d have to do it through your wallet.
Non-custodial wallets can be thought of as equivalent to a traditional bank account. When you deposit money into your checking account, for example, you have full control over that money. You can withdraw it at any time and send it wherever you want. With crypto, though, your checking account exists on a decentralized blockchain network with no single authority in charge of transaction verification or security.
NFT custody solutions
A simple way to explain what’s at stake is to think of your crypto holdings as money sitting in a bank. Custodial solutions, like Coinbase, hold your money in their bank accounts. It allows you to view your balance. You can transfer your wallets, and also can transfer your assets.
List of custodial wallet
– Coinbase Wallet – TrustWallet – kybernetworkwallet – Ethos Universal Wallet – Etherium Contract Wallet