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September 20, 2022

Non-Custodial Wallet vs. Custodial Wallet: Protect Your Crypto — Not Your Keys, Not Your Crypto 

Disruptive technologies of human history have increased freedom and democratized information by making it available to the many rather than the privileged few. Cryptocurrency does the same, but for money. It's harboring a new age of self-sovereign financial power, and the world is beginning to take notice. But to uphold that power, we need to be able to have access to our money — on our own terms and with unfettered access.

Who stores your cryptocurrency determines its accessibility. If your wallet is in someone else's hands, is it really your money? For example, a safe in your house is analogous to self-custody vs. a lockbox in a bank, which would be custodial– you can only access the lockbox on the bank’s terms. There are two main types of wallets, and it's essential to know the difference.

What Are Custodial Wallets?

A custodial wallet is a digital wallet that a service provider, such as an exchange or broker, holds on your behalf. This service provider, called a custodian, has access to the private keys associated with your wallet address. 

Put simply, your private keys are a sort of password that gives you access to your cryptocurrency. In using a custodial wallet, you're entrusting a third party with the responsibility of keeping your private keys safe.

Benefits of Custodial Wallets

  • Ease of use

    : Custodial wallets are often very user-friendly, which can be great for those just getting started with cryptocurrency. There's no need to worry about backing up or securing your private keys — the custodian will do that for you.

  • Familiarity:

    If you've ever used any banking app on your mobile device, chances are you're familiar with how a custodial crypto wallet works. They often look and feel similar to traditional banking mobile apps, making the transition to using cryptocurrency much smoother.

  • Convenience:

    In most cases, all you need to do to get started with a custodial digital currency wallet is sign up for an account with the service provider and deposit some cryptocurrency. Once you do that, you can start using your wallet right away.

Risks of Custodial Wallets

But there's a big downside to custodial wallets: control of the users’ funds disappears. There's an often propagated saying in the crypto community: "Not your keys, not your coins." 

Here are some of the main risks of using custodial wallets:

  • Security risks: Because custodians have control of your private keys, they also have control of your cryptocurrency. If something happens to your custodian's systems, your cryptocurrency could be at risk. We've seen this happen multiple times before, with some work from high-profile hackers resulting in the loss of millions of dollars worth of cryptocurrency.

  • Loss of control: In addition to security risks, you also lose control over your money when you use a custodial wallet. For example, if you want to move your cryptocurrency from one custodian to another, you may go through a lengthy and complicated process. And in some cases, you may not be able to move your cryptocurrency at all. If a custodian decides it doesn't like your activity, it could freeze your account.

  • Dependence on third parties: When you use a custodial wallet, you rely on a third party to keep your money safe. This not only exposes you to the security risks mentioned above, but it also means that you're at the mercy of that third party, their rules, and their terms of service. Many view this control as a form of financial censorship and as something diametrically opposed to the soul of censorship-resistant money.

What Are Non-Custodial Wallets?

A non-custodial wallet is a digital wallet where you — and only you — have complete control over the private keys associated with your wallet address. Because you're the only one with access to your private keys, only you have control of your money. No one can stop you from sending or receiving cryptocurrency, and no one can freeze your account. But with great power comes great responsibility; it's up to you to keep your private keys safe.

Benefits of Non-Custodial Wallets

  • Security: One of the main benefits of using a non-custodial wallet is that

    you

    completely control your security. Because you hold the private keys, only you can decide how to keep them safe. You can engrave them on a metal sheet, store them securely in your own hardware wallet, or even memorize them (aptly named a brain wallet). Whatever method you like the best, the security of your non-custodial crypto wallet is entirely up to you.

  • Privacy: Another benefit of holding your own private keys is that it allows you to maintain a high degree of privacy. When you use a custodial cryptocurrency wallet, the custodian can see all of your activity. When you sign up with custodial wallet providers, you often have to give them personal information like your name, email address, phone number, and social security number. That's a lot of information for someone to have on you, and in the wrong hands, it could be used to steal your identity.

  • Control: In addition to being in control of your security, you're also in complete control of your digital assets. You can send and receive cryptocurrency without anyone's permission. No limitations. No red tape. No waiting for customer service to approve your transaction. Just you and your crypto.

Risks of Non-Custodial Wallets

The main risk of using a non-custodial wallet is that if you lose your private keys, you lose your money. There's no customer service to call and no one to help you recover your crypto. That's why it's so important to ensure that you have a backup (or two) of your private keys in a safe and secure location.

However, there are some non-custodial services and wallet providers who have implemented measures to help you recover your private keys if you lose them or if the company goes defunct. One such company is Ember Fund, which implements a unique system designed to help you recover your crypto — even if Ember goes out of business. Specifically, Ember has a utility script you can run that will help you recover your crypto from any non-custodial wallet.

Four Popular Non-Custodial Wallets

Ember Fund

Designed by industry veterans and built for you, Ember is the simplest and most effective way to get involved in crypto. Ember offers portfolios with baskets of cryptocurrencies that they automatically rebalance and optimize for growth. And at any point, you can customize your portfolio to include the specific cryptocurrencies you want — or withdraw your funds.

Exodus

A suite built for web3 and DeFi, Exodus allows you to manage your cryptoassets, explore myriad crypto protocols, and connect to decentralized applications (dApps) all in one place. Built for desktop and mobile, Exodus focuses on a simple interface and easy-to-use experience.

MetaMask

MetaMask is a digital wallet that allows you to store, send, and receive cryptocurrency. MetaMask also allows you to access dApps and interact with the Ethereum ecosystem: NFTs, DeFi, Dapps, and web3 applications. Metamask does not support Bitcoin, though you can use MetaMask to store any ERC20 tokens.

Trust Wallet

A non-custodial wallet with staking capabilities, Trust Wallet supports ERC-20 and ERC721 tokens, as well as popular cryptocurrencies like Bitcoin, Ethereum, Litecoin, and more. Trust Wallet also allows you to access dApps and web3 applications.

Four Popular Custodial Wallets

Coinbase

One of the largest and most popular cryptocurrency exchanges, Coinbase is a custodial wallet service that allows you to buy, sell, and store cryptocurrency. Coinbase offers earning and lending rewards, professional trading services, and an easy-to-use interface for beginners.

Crypto.com

Crypto.com is another custodial wallet and exchange service that allows you to buy, sell, and store cryptocurrency. What makes Crypto.com different from many custodial exchanges is that they have a non-custodial DeFi wallet option across multiple chains.

FTX

A derivatives exchange built by traders, for traders, FTX offers a custodial wallet service that provides more granular control over trading strategies and risk management.

Kraken

One of the oldest and most popular cryptocurrency exchanges, Kraken offers a custodial wallet service with advanced security features, margin and lending options, and an OTC trading desk.

Non-Custodial Wallets vs. Custodial Wallets: Which Is Right for You?

There's no absolute answer to whether a non-custodial or custodial wallet is right for you. It depends on your risk tolerance, investment goals, and trading strategies. 

That said, if you use a custodial wallet service, understand the risks involved in entrusting your crypto to a third party. Remember — "not your keys, not your coins."

Non-custodial wallets put the power of your crypto in your hands — just how money should be. If your money's not yours, whose is it? And while many non-custodial wallets don't have measures in place to help you recover your crypto if you lose your keys, some do. 

Ember offers one such wallet, which makes it an excellent choice for those looking for control and ease of use.

Download the Ember Fund app today and take control of your crypto.

Sources:

Ember Fund

Exodus Wallet

MetaMask

Trust Wallet

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