Custodial Wallet VS. Non-Custodial Wallet: Which One is Better?

4 min readSep 28, 2021

The goal of Bitcoin is to give each user total control over his money. In other words, a user’s money cannot be controlled by a third-party, such as a government or financial institution, if they are utilized lawfully. Well, if someone has been roaming around or has been into crypto and Bitcoin, the individual has almost heard the phrase that says, “Not your keys, not your Bitcoin.” What does exactly that mean?

If you’ve ever bought cryptocurrency, you’ve probably done so with a custodial wallet. A custodial wallet is defined as a wallet in which the private keys are held by a third party. Those third-party cryptocurrency exchanges claim to secure your crypto assets for you, but in doing so, you give up complete ownership of your crypto holdings.

Users must grasp the distinctions between custodial and non-custodial wallets to fully benefit from Bitcoin technology or cryptocurrency in general.

Pros and cons of a custodial wallet

A Custodial Wallet is one in which the private keys are controlled by a third party. That is, the third party has complete control over your cash, and all you have to do is provide authorization to make and receive payments.

In a custodial wallet, a third-party authority maintains all of the funds, while users are unable to conduct any transactions without their participation. Unlike other wallets, a custodial wallet does not charge a transaction fee. Customers can conduct transactions inside the ecosystem for free. Even though a user loses the memorization passphrase or loses his encryption key, restoring access to the wallet and deposited money is simple.

Users do not have control over their Bitcoin wallets while using custodial cryptocurrency services. The management of financial transfers and associated operations, including freezing the stored amount, is controlled by a third party, a custodian which is being the drawback of custodial

There are some security issues while using the custodial wallet. Though they are not oftentimes targeted by the hacker, they are often vulnerable to various security breaches.

Pros and cons of a non-custodial wallet

Advanced users should use non-custodial alternatives. These allow them to have complete control over a blockchain wallet address. The majority of these will provide them a recovery key or phrase that will allow them to use their wallets on other devices.

A non-custodial wallet, to put it simply, is a form of blockchain-based cryptocurrency wallet that allows individuals to act as their banks. It gives individuals total control over their funds as well as the private key linked with them.

This wallet offers two types of keys for performing the transactions:

The mnemonic seed is a word of 12–24 value which is being built for encapsulation of real private keys. The key gives a user access to multiple accounts at the same time.

The other type of key is the raw private key This is the true private key which is a combination of alphabetic and numeric that is also saved on the user’s computer.

The fact that non-custodial wallets provide users individual access to their assets is the major reason for their popularity. Users do not need to rely on a third party to manage their funds or carry out any necessary tasks. There is complete safety in terms of security breaches and data protection. Following this, there is another option that is being provided by this wallet; a user can do instant transactions without any approval.

Conclusion

Nowadays, these custodial wallets are being popular in the mainstream. The reason for that is their high UI and user demands for control over their crypto assets. On the other hand, the non-custodial wallet has experienced tremendous success as they continuously improve their services and user-experience.

Although Bitcoin is becoming more widely known, only a small percentage of its users are well knowledgeable on the technology and its hazards. When selecting a service, it is critical to consider the technology and business strategy employed. The difference between a fantastic experience and a bad one may be as simple as managing expectations and making a small effort to grasp the technology.