Ever wondered how and where your crypto is stored? There are many different types of crypto wallets that token holders can use to store crypto. But, they can generally be split into two broad categories: custodial and non-custodial wallets.
A custodial wallet, like Binance Custody, is a service that owns the private key to your wallet and holds your assets in custody. Your regular Binance account is also a custodial wallet. In contrast, if you use a non-custodial wallet, you alone have complete control over your assets. MetaMask and Binance Chain Wallet are examples of non-custodial wallets.
Both custodial and non-custodial wallets have their pros and cons. Let's explore their differences so you can learn when to use one type or the other.
If you've ever used Bitcoin or other cryptocurrencies, you know that having a digital wallet is essential. You will need one if you want to make transactions, trade on a crypto exchange, or use blockchain applications. As such, it's important to understand how cryptocurrency wallets work and the main difference between non-custodial and custodial wallet providers.
How crypto wallets work
Technically speaking, crypto wallets don't really store your digital assets. Instead, they generate the information you need to use crypto. Still, most users adopt the verb to make it easier for beginners, so we will use the term throughout this article.
Among other things, a crypto wallet is made up of two main components – a public key and a private key.
Your private key, however, should be treated as a confidential password because it signs transactions and provides access to your funds. As long as you keep your private key safe, you will be able to access your crypto from any device.
While cryptocurrencies are digital, crypto wallets that hold private and public keys can come in various options – the keys can be printed on a piece of paper, accessed via desktop wallet software, or stored offline in hardware wallet devices.
But regardless of the wallet type, you will always have either a custodial or a non-custodial crypto wallet.
What is a custodial crypto wallet?
As the name suggests, a custodial crypto wallet is one where your assets are held in custody for you. This means a third party will hold and manage your private keys on your behalf. In other words, you won't have full control over your funds - nor the ability to sign transactions. But using a custodial crypto wallet service isn't necessarily a bad thing.
In the early days of Bitcoin, all users had to create and manage their own wallets and private keys. While "being your own bank" brings a lot of benefits, it can be inconvenient and even risky for less experienced users. If your private keys get compromised or lost, you will lose access to your crypto assets permanently. Blockchain analysis reports suggest that over 3 million BTC might be lost forever.
There have also been instances of crypto inheritance being unretrievable because the private keys were held by the original crypto owner alone. You can prevent such incidents from happening by sharing access to your assets with a custodian.
Even if you happen to forget your cryptocurrency exchange password, you should still be able to access your account and assets by contacting customer support. However, if you're using a non-custodial wallet, you are responsible for keeping your crypto safe.
So, in many cases, it makes sense to rely on a custodial wallet service. But, this also means that you are entrusting your private keys to a third party. That's why it's important to choose a reliable exchange or service provider.
Some information to look out for when exploring custody service providers would be whether it is regulated, what types of services you get, how your private keys are stored, and whether there is insurance coverage.
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 full control over their funds, non-custodial wallets are the best option. Since there are no intermediaries, you can trade crypto directly from your wallets. It's a good option for experienced traders and investors, who know how to manage and protect their private keys and seed phrases.
Custodial vs non-custodial wallets
Wallet holder ownership
Accessible to anyone
Pros and cons of custodial wallets
As discussed, the major downside of custodial wallets is that you have to trust your funds and private keys to a third party. In most cases, these service providers will also require identity verification (KYC). The advantage, however, is the peace of mind and convenience. You won't have to worry about losing your private key and you can contact customer support when you run into trouble.
When using custodial services, make sure you choose a reliable company that offers high security and insurance coverage. Look out for custodians that are regulated and compliant.
Pros and cons of non-custodial wallets
Without a third-party guardian, non-custodial wallets offer full control over your keys and funds. In other words, your assets are truly yours and you can be your own bank. In addition, non-custodial transactions tend to be faster as you don’t have to wait for withdrawal approval. Finally, without a custodian, you don't incur extra custodial fees, which may be costly depending on the service provider you choose.
As we’ve seen, one disadvantage of using non-custodial wallets relates to accessibility and ease-of-use. They are usually less user-friendly and tend to pose a problem to first-time crypto holders. As non-custodial service providers evolve, this should be resolved in the future.
Of course, you also bear the sole responsibility of your keys and have to take your own precautions when managing them. This means that instead of trusting someone else to take care of your funds, you have to trust yourself.
Using a strong password.
Enabling two-factor authentication (2FA) as an added layer of protection.
Being cautious when clicking links and downloading new software.
Which wallet type should I use with my crypto?
Both wallet types are good to store your crypto assets, including NFTs. Most traders and investors use both in different situations. However, you should make sure that the wallet you use supports the type of crypto you wish to store. They can't all be stored in the same way.
There are different blockchain networks running various types of cryptocurrencies. We can classify these types by their token standards, but keep in mind that we may have the same tokens running on multiple blockchains under different standards. For example, you can find BNB as a BEP-20 on the BNB Smart Chain, but also as a BEP-2 token on the BNB Beacon Chain.
Here are some of the most common token standards:
BNB Smart Chain: BEP-20, BEP-721, BEP-1155
BNB Beacon Chain: BEP-2
Ethereum: ERC-20, ERC-721, ERC-1155
Sometimes, wallets that are constantly upgrading to meet the demands of their users might support more tokens as time goes by. For instance, Binance Custody currently supports BTC, ETH, BCH, LTC, BUSD, BNB, CAKE, and many other ERC-20 tokens. Binance Custody will gradually include more token types to support user demand.
Bear in mind that whether you are using a custodial or non-custodial wallet, you should always be careful and adopt best practices to enhance the security of your funds.