A crypto wallet is a software application or hardware device that holds your digital assets and safeguards your private keys.
If you wish to hold or trade cryptocurrencies and interact with decentralized applications, you must have a crypto wallet. Generally, these wallets are used to send and receive digital assets such as Bitcoin or Ether. However, some wallets now support the storage and transfer of NFTs. Every wallet has two key elements: a public key and a private key.
Public Key — is your wallet’s public address. It generates wallet addresses through which you or others can send assets.
Private Key — is your wallet’s safety key which you should treat as a confidential password. Private keys are used to access funds and sign transactions.
There are various wallet types: web-based, desktop wallets, mobile wallets, hardware wallets, and paper wallets. However, these wallets are primarily classified into custodial wallets and non-custodial wallets.
Read: 6 Best NFT Wallets to Buy and Store your Digital Assets in 2021
Custodial and non-custodial wallets have different applications. Both have their own set of benefits and drawbacks. Let’s look at both types and evaluate their purpose.
What are custodial wallets?
A custodial wallet is a third-party wallet that stores NFTs, coins, and private keys. The main idea behind a custodial wallet is that, instead of worrying about the security of your crypto assets and private keys, you secure them with a responsible third party.
The classic example of a custodial wallet is a centralized exchange, which holds your assets and is responsible for their security. If you previously traded NFTs or cryptocurrencies on centralized exchanges like Binance or Coinbase, you were using a custodial wallet.
You must conduct thorough research when selecting a custodial wallet because you would be entrusting your assets to a third party.
Advantages and disadvantages of custodial wallets
Advantages
- If you’re new to cryptocurrencies and NFTs and data security isn’t your strong suit, you might be better off entrusting your coin to a third party.
- A third-party custodian can assist you in ensuring that you do not lose access to your assets.
- Custodial wallets are frequently required when trading on big cryptocurrency exchanges.
- Some custodians will pay you interest on your cryptocurrency investments.
Disadvantages
- Because you do not own your private keys, security is in the hands of a third party.
- Someone else is holding your money for you, which means they have the option to steal it.
- Because they are centralized, custodial wallets function similarly to the traditional banking system.
- Accessing new coins created by forks of existing cryptocurrencies may be unavailable to you.
What are non-custodial wallets?
A non-custodial wallet is a piece of software or hardware that gives you complete control over your blockchain-based assets. You are the ultimate owner of your keys and resources with non-custodial wallets. No one can make a transaction on your behalf.
While non-custodial wallets do not require a third party, it is your responsibility to keep your wallet and keys secure. If you lose, destroy, or forget your wallet and haven’t taken measures to access your funds, you may lose access to your assets.
Non-custodial wallets can be browser-based, mobile applications, desktop software, or hardware wallets, which are the most secure.
Advantages and disadvantages of non-custodial wallets
Advantages
- Your assets are significantly more difficult to steal because you have complete ownership over them.
- You can conduct business without someone peeking over your shoulder.
- You can acquire access to advanced services such as decentralized exchanges or farming.
- Using a combination of hardware and paper wallets, you can gain access to better levels of security.
- You will have complete access to any profits or staking rewards derived from your cryptocurrency holdings.
Disadvantages
- Quick trading becomes challenging through non-custodial wallets because you must first transfer your funds to an exchange.
- Being in charge of your security involves a considerable deal of responsibility, and human error may result in theft or unintended loss of your assets.
- User interfaces that are more difficult to grasp are more likely to be displayed to you.
Which wallet is better for you?
The wallet you choose depends on your objectives.
Custodial wallets are helpful if you wish to trade these assets and rely on a third party to ensure that you don’t lose them. You should have no problems if you save your funds with a reputable, regulated business.
However, if you desire freedom and you understand how to act responsibly with your crypto holdings, a non-custodial wallet is the way to go.
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