Custodial vs. Non-Custodial NFTs: What’s the Difference?

TL;DR 

As the DeFi ecosystem grows, NFTs are becoming increasingly popular. When trading or holding NFTs or other crypto assets, there’s a choice between using either custodial services or non-custodial services. A custodial service owns the private key to your wallet and holds your assets in custody. The Binance NFT Marketplace is an example of a custodial NFT platform that you can log into with a registered account.

A non-custodial service gives users complete control over their wallets and digital assets. Users can trade their NFTs directly from their wallets. This creates a market without the need for intermediaries.

Introduction

Non-fungible tokens (NFTs) are in high demand all across the blockchain and DeFi ecosystems. There’s a lot of information on the NFT topic already, but we don’t often discuss custodianship. Who actually has full control of the NFT you’ve just created or purchased? It may be that you have less custody of your NFT than you think.

This concept might be familiar if you’ve already looked into wallets and cryptocurrencies. In fact, having custody of your NFT or letting someone else hold it are both valid options. It all depends on what you’re looking for and the kind of responsibility you want to have.

The main ways you’ll encounter custodial and non-custodial NFTs are when choosing a wallet and the platforms you use to trade or create NFTs.

What Is a Crypto Wallet?

A crypto wallet is an essential tool for holding cryptocurrencies and interacting with blockchains. If you want to make transactions and use decentralized applications (DApps), you’re going to need a wallet. There are two main aspects to any wallet: a public key and a private key. 

Your wallet’s public key is used to generate addresses that you or others can send crypto to. Your private key, which you should treat as a confidential password, signs transactions and provides access to your funds. There are a variety of options to choose from when picking a crypto wallet. The keys can be printed on a piece of paper, accessed via desktop wallet software, or contained in hardware wallet devices.

Crypto wallets don’t just have to store cryptocurrencies either. Depending on the wallet you have, you can also store NFTs. You’ve probably used a crypto wallet to send or receive digital assets like Bitcoin (BTC), Ether (ETH), or stablecoins. But some crypto wallets can also store and transfer NFTs, which are tokens issued on a blockchain.

What Is a Custodial Crypto Wallet?

A custodial crypto wallet doesn't give you full control of your private keys. A third party (such as an exchange or custodial wallet service provider) will store your assets for you. You will not be able to access your private key yourself, but this isn’t necessarily a bad thing. It all depends on your needs.

Due to blockchain technology's decentralization, you can permanently lose access to your wallet if you misplace your private key. By having a custodian for your private key, you can pass the responsibility onto them. Even if you forget your exchange password, you will likely be able to get back into your account with the help of customer support.

However, don’t forget that in this case, a third party has custody over your funds. Your crypto will only be as safe as the custodian keeps it. That’s why it’s important to choose a reliable exchange or service provider.

What Is a Non-Custodial Crypto Wallet?

A non-custodial crypto wallet is a wallet where only the holder possesses and controls the private keys. For users who want more control over their funds, non-custodial wallets are the best option.

But, as mentioned before, the responsibility for keeping the key safe is in the hands of the wallet owner. If they lose the keys and can't remember their backup seed phrase, the wallet and its funds are lost. There are several non-custodial wallets available as apps, executables, and browser extensions. Popular examples include Trust Wallet and MetaMask. You can also find wallet services, such as Tor.us, that allow users to use social logins to secure their keys, making the process more secure and convenient.

Which Wallets Can I Use With NFTs?

You can use both custodial and non-custodial wallets to store your crypto art or other NFTs. However, make sure the wallet you use supports the type of NFT you want to keep. NFTs can exist on different blockchains, and even on an individual blockchain, there can be various kinds of token standards. Each standard has different characteristics and rules that define how the tokens are created and used.

The most common token standards are:

1. Ethereum: ERC-721, ERC-1155.

2. BNB Smart Chain: BEP-721, BEP-1155.

If you plan on storing an NFT in either a custodial wallet (like on a cryptocurrency exchange) or a non-custodial wallet, check first the NFT's token standard. With this information, make sure your wallet supports the blockchain and token standard of your digital art.

MetaMask, Trust Wallet, and MathWallet are all non-custodial wallets that accept the most common NFTs you're likely to encounter. But when interacting with a centralized exchange, you'll use a custodial wallet. Your best option is to check your exchange's FAQ or website for more detailed information on the NFTs they accept.

How Do I Buy an NFT With My Wallet?

How you buy NFT collectibles will depend on two things: the type of wallet and the marketplace you want to use. If you’d like complete control over your NFT purchase and want to store it in a non-custodial wallet, you will have to use a decentralized platform.

Decentralized platforms (non-custodial)

If you've used Binance DEX before or another decentralized exchange, you might already be familiar with a non-custodial system. A decentralized exchange doesn't require you to make an account or sign up. You also usually deal with trades directly between each party's wallets.

NFT marketplaces (custodial)

An NFT marketplace acts as a custodian during the purchasing process. If you want to bid on an auction, you will need to send your funds to the platform to hold them in escrow. Once you have purchased your NFT, you can either keep it in their custodial wallet or withdraw it to another wallet.

The Binance NFT Marketplace also requires you to transfer funds into their custodial spot wallet to purchase and bid on NFTs. Your Binance account must be "loaded" with crypto as the website will not directly interact with external wallets.

How Do I Mint or Sell an NFT Using My Wallet?

Decentralized platforms (non-custodial)

The process of creating an NFT is called minting. To mint an NFT, you need to connect your wallet and upload your digital assets to an NFT platform. There, you can upload images, audio, or video files along with some metadata (to describe your NFTs). After minting, your assets will be stored on-chain and cannot be altered. If you wish, you may put your NFTs up for sale.

As soon as the sales are completed, your NFTs will be distributed to the buyers. The proceeds of the sales will be transferred from the buyers’ wallets to yours. The entire process should be automated and secured by the rules of smart contracts.

NFT marketplaces (custodial)

To sell your NFT on a custodial marketplace, you’ll need to deposit it into the platform you’re using. Make sure that the platform accepts the type of NFT you would like to sell. If you’re not careful here, you can easily lose your NFTs by sending them to an incompatible platform. Each marketplace will have different options for sales, such as fixed price sales or auctions.

Once you have successfully sold your NFT, the marketplace will automatically transfer it to the new owner. Your funds will either be sent directly to your external wallet or left on the platform for you to withdraw.

Pros and Cons of a Custodial NFT Service

A custodial service provides a simple way to match NFT buyers and sellers that is easy for newcomers to use. There’s no need to worry about losing your key, which is a relief even for more experienced users. Interfaces are generally user-friendly, and the whole process is more forgiving when it comes to making mistakes. If a problem occurs, the platform should have support in place to help.

But for many crypto-enthusiasts who value decentralization, not controlling your assets directly is a huge disadvantage. KYC checks are also standard on some custodial NFT services that require your name, address, and ID. Once your data is stored, there is always a risk that it may be stolen or breached. It’s also not unknown for there to be hacks of custodial services.

Pros and Cons of a Non-Custodial NFT Service

Non-custodial NFT platforms provide much greater control throughout the transaction process. Trading NFTs directly from your wallet without an intermediary provides cheaper fees and more privacy. However, these factors are more dependent on the network you’re using. If you value privacy, there is no need for KYC checks so you can trade anonymously. All you need is a wallet to get started.

There are a few downsides to non-custodial control. For new users who aren’t so familiar with wallets, non-custodial options can be less user-friendly and convenient than custodial ones. Fortunately, however, service providers like Tor.us are making dapps a lot easier to use.

As of June 2021, non-custodial exchanges tend to have lower liquidity and volume than custodial ones - except for big players like Uniswap. But when it comes to NFTs, the industry is still in very early stages, making it hard to measure. Still, liquidity depends on the user base and trading volume, and there is a good chance that non-custodial services will outgrow custodial ones in the near future. There are also projects working on cross-platform, non-custodial marketplaces that will likely prevent liquidity issues.

Custodial vs. Non-Custodial NFTs at a Glance

Closing Thoughts

Depending on what you are looking for, both custodial and non-custodial options have their advantages. A non-custodial NFT platform is a great choice for anyone who values autonomy and security.

For less experienced users, it might make more sense to use a custodial NFT marketplace and wallet. Custodial services allow you to spend more time interacting and less time learning how to navigate around wallets. In this case, Binance NFT Marketplace is a great option to consider.