Summary

Ever wondered how and where your cryptocurrency is stored? There are many different types of cryptocurrency wallets available to token holders to store cryptocurrency. Cryptocurrency wallets can generally be divided into two broad categories: custodial and non-custodial.  

A custodial wallet (such as Binance Custody) is a service that holds the user's wallet private key and custodial assets. A regular Binance account is also a custodial wallet. On the contrary, if you use a non-custodial wallet, the user will have full control over his own assets.  MetaMask and Binance Chain wallets are typical non-custodial wallets.

Both custodial and non-custodial wallets have their pros and cons. Next, we will introduce the differences between the two so that you can understand what situations these two types of wallets are suitable for.

Introduction

If you have used Bitcoin or other cryptocurrencies, you will know the importance of digital wallets . Completing a transaction, trading on a cryptocurrency exchange or using a blockchain application is impossible without a digital wallet. Therefore, you must understand how cryptocurrency wallets work and the key differences between non-custodial and custodial wallet providers.

How a cryptocurrency wallet works

A cryptocurrency wallet is a A tool for interacting with blockchain networks. Among other things, you can use it to send and receive cryptocurrencies or access decentralized applications (DApps).

Technically speaking, cryptocurrency wallets do not actually store digital assets. Instead, they generate the information needed to use cryptocurrencies. Even so, in order to make it easier for beginners to get started, most users still use the verb "storage", and this article will also use this terminology.  

Also, a cryptocurrency wallet consists of two main components - public keys and private keys.

If someone wants to send you cryptocurrency, they can do so via an address generated by your wallet's public key. At this point, your wallet address and public key can be shared with others (hence the name "public key").  

In contrast, the private key is a secret password used to sign transactions and provide access to funds. As long as your private keys are safe, you can access your cryptocurrency from any device.

Although cryptocurrencies are digital products, cryptographic wallets that hold private and public keys come in various forms - keys can be printed on a piece of paper, accessed through desktop wallet software, or stored offline for hardware wallet devices.

Some wallets can also store and transfer NFTs, which are non-fungible tokens issued in the blockchain.

Whatever you choose, you can’t go beyond a custodial or non-custodial cryptocurrency wallet.

What is a custodial cryptocurrency wallet?

As the name suggests, a custodial cryptocurrency wallet is a wallet that holds your assets for you. This means that the third party holds and custody the private keys on your behalf. In other words, you don’t have full control over your funds and you can’t sign transactions. Using a custodial cryptocurrency wallet service is not necessarily a bad thing.

In the initial development stage of Bitcoin, all users must create and keep their own wallets and private keys. Although there are many benefits to "acting as your own personal bank", it is difficult for inexperienced users to get started and may even face risks. If your private key is stolen or lost, you lose access to your encrypted assets permanently.  Blockchain analysis reports indicate that more than 3 million BTC may be lost forever.

There are also cryptocurrencies where inheritance rights cannot be retrieved because only the original cryptocurrency owner holds the private key. You can prevent this from happening by sharing access to your assets with your custodian.  

Even if you accidentally forget your cryptocurrency trading platform password, you can still contact customer service to retrieve your account and assets. If you use a non-custodial wallet, you must keep your cryptocurrencies safe.

Therefore, custodial wallet services are more suitable for most users. However, this means that your private keys are entrusted to a third party. Therefore, it is crucial to choose a reliable trading platform or service provider.

When researching hosting providers, consider the following: whether it is regulated, the types of services offered, how private keys are stored, and whether insurance is offered.

For example, Binance Custody is regulated and compliant, offering standard insurance for businesses’ Binance accounts. On request, it also offers crime insurance and other customized insurance.  Binance Custody also uses multi-signature wallets (multisig), a protocol that requires all parties to approve cryptocurrency transactions before executing them, eliminating centralization risks.

What is a non-custodial cryptocurrency wallet?

A non-custodial cryptocurrency wallet means that only the holder controls the private key. This type of wallet is suitable for users who want to have complete control over their funds. You can trade cryptocurrencies directly from your wallet without the intervention of an intermediary. This is a good option for experienced traders and investors who know how to keep and protect private keys and mnemonic phrases.

When interacting with a decentralized exchange (DEX) or decentralized application (DApp), you need to use a custodial wallet. Uniswap, SushiSwap, PancakeSwap and QuickSwa are all typical decentralized trading platforms that require non-custodial wallets.

Trust Wallet and MetaMask are typical non-custodial wallet service providers. After using this type of wallet, you are responsible for the security of your mnemonic phrase and private keys.

Comparison of custodial and non-custodial wallets