What Do Custodial and Non-custodial Cryptocurrency Wallets Mean?

Any number of email accounts and digital wallets are permissible for usage by a single user. In most cases, they utilize not only a personal wallet but also the built-in cryptocurrency wallets available in a variety of applications, such as those found on cryptocurrency exchanges.

What is a Cryptocurrency Wallet?

A cryptocurrency wallet is a piece of software that allows users to interact with blockchain-based coins. You will be able to create and manage addresses with it, which will allow you to store and transfer digital assets. In point of fact, this is an application, complete with a user interface and a number of different features for managing the cryptocurrency assets that are held in the address.

In most cases, there is a public key and a private key associated with each address. They are linked to one another and are associated with a particular address.

The address that is stored in the blockchain is a “compressed” form of the public key, which means that it may be accessed by any user who has access to the blockchain. The creation of digital signatures and the verification of transactions both need the usage of the private key. It is only known to the person who owns the address, as it is the key to accessing the owner’s cash.

The username and password that were chosen at the time of registration are the ones who are responsible for allowing access to the bitcoin storage. Keys are not required.

What exactly is a custodial cryptocurrency wallet, and when exactly would one require it?

An application for storing and transferring cryptocurrency is known as a custodial wallet. This type of wallet is distinguished from others by the fact that its operator (the custodian) administers the addresses of its users and has access to their private keys. In addition, clients who use a custodian are obligated to go through the know-your-customer (KYC) procedure.

For centralized cryptocurrency exchanges, there is the option of using a custodial wallet that is built right in. Even though every customer has their own unique account with their own balance, all of the monies are stored in a limited number of addresses that are handled by the exchange. This not only makes working with trading instruments easier but also enables you to conduct platform-wide transactions without incurring any fees.

Individual customers very infrequently come into contact with custodial wallets anywhere else outside within specialized applications. On the other hand, institutional investors, who are companies that deal with huge quantities of money, frequently use solutions like these. They then place the cryptocurrency in the care of a reputable organization that offers a higher level of protection along with other services such as insurance. Xapo, BitGo, Gemini, and Coinbase Custody are some notable examples of cryptocurrency custody services.

What is non-custodial crypto wallet and why would you need it?

By not providing their private keys to any third party, users of a non-custodial bitcoin wallet are able to maintain complete control over the funds associated with their addresses. An application of this kind is unable to put user funds on hold or manage them, but it is not responsible for ensuring their security.

In most cases, this refers to a piece of software that may be installed on a computer, mobile device, or web browser. It is not necessary to perform KYC in order to generate an address on the blockchain by using an application that is not a custodian.

The publication of the source code for popular wallets that do not store user data adds an additional layer of security. This makes it possible for unbiased specialists to confirm that the programs being used for storing cryptocurrency are, in fact, secure. Additionally, such projects frequently have the backing of an entire community of computer programmers.

Which Type of Wallet will Suit You?

The custodial wallet of a third-party application is a possible storage location for funds that are being used for trading or investment (in the same transaction) (for example, on an exchange). Despite this, you ought to beef up the security of your profile and, in particular, establish a two-factor authentication system.

We also advise you to store digital assets that are not currently being utilized in a crypto wallet that is not being held in custody and to which you have exclusive access at the private key level.

What do we mean when we talk about “hot” and “cold” wallets?

Every kind of wallet may be broken down into one of two categories: “hot” wallets, which are exclusively found in the form of digital apps, and “cold” wallets, which are based on some kind of physical media.

It will be sufficient for an inexperienced user to initiate a “hot,” also known as a software wallet. They are compatible with an extremely wide range of operating systems and devices.

MetaMask is now one of the most well-known “hot” cryptocurrency wallets available for Ethereum and other networks compatible with EVM. In addition, ERC-20 tokens and ETH can be saved in your MyEtherWallet account. They frequently employ the tried-and-true crypto storage solution known as Electrum when dealing with bitcoin.

There are other multi-currency wallets available, such as Exodus, Blockchain.com, or Trust Wallet. These wallets handle numerous blockchains at the same time and can store more than one type of cryptocurrency.