What are custodial and non-custodial crypto wallets?

1. Is it possible to get by with just one crypto wallet?

Keeping your cryptoassets intact is as important as buying them or earning them profitably. As technology and interest in the cryptosphere evolve, more and more cybercriminals are going after users’ coins, and cryptocurrencies are becoming one of their favorite targets.

Novice cryptoinvestors are often misled by the name of this tool: users may believe that their funds are safe by default in any cryptocurrency wallet, and prefer to store coins directly in a cryptocurrency exchange. But that’s not safe.

If you have something to lose, divide your coins into those that you’ll need for quick transactions – you can leave them in custodial cryptocurrencies, and those that you intend to keep – they’re better saved in non-custodial cryptocurrencies.

2. What is a custodial cryptocurrency wallet?

Custodial wallets resemble banking instruments. Their distinctive feature is that the user has no full control over their funds, because the operator (custodian) has access to the private key. This has its advantages. For example, having lost passwords or keys, a user can get access to his/her funds again.

Many cryptocurrency exchanges (Coinbase, Kraken, Bitfinex, Binance, Poloniex, Bittrex, Coinex, Bitstamp, etc.), trading platforms and brokerage services have custodial wallets. Such integration simplifies the work with other tools of these platforms, is profitable for transactions (for example, due to the absence of commissions within the ecosystem) and effective, if you remember that the actual control of funds belongs to a third party. This category also includes such popular cryptocurrencies as Freewallet, Xapo, BitGo, Crypto.com, etc.

Also you may like >  What is a bitcoin?

3. What are the disadvantages of custodial cryptocurrencies?

Among the main disadvantages of custodian cryptocurrencies are custodian access to user funds and risks of losing them due to hacking, fork, authorities or court order. The lack of access to one’s own funds during technical work can also be a frustrating experience.

For example, in the summer of 2016, hackers withdrew almost 120 thousand bitcoins from the cryptocurrency wallets of Bitfinex crypto exchange users, which stored funds on a hot wallet. Neither two-factor authentication nor multisignatures prevented the theft of funds.

A vivid example of the shortcomings of custodial wallets was the closure of the Russian crypto-exchange BTC-e. In the summer of 2017, the FBI seized its servers and U.S.-based assets. Later, the site relaunched under a new name WEX and stopped working again, its customers lost access to funds.

4. What is a non-custodial cryptocurrency wallet?

A non-custodial cryptocurrency wallet can be considered a cryptocurrency wallet that retains full control over the user’s keys and their funds. This category can include hardware, mobile, paper, desktop and web wallets.

The most popular non-custodial wallets are Abra, MyEtherWallet, Electrum, MyCrypto, Wirex, Button Wallet, Exodus, ZenGo, Paytomat, Bitcoin.com, BRD, Blockchain, BTC.com, Electron Cash, Copay, Jaxx, Coinomi, Atomic Wallet, Guarda, Wasabi Wallet, Edge.

5. Are non-custodial crypto wallets completely safe?

No. Non-castodial cryptocurrencies have their drawbacks. For example, if you lose your private key and the phrase to recover it, the funds will be irretrievably lost (so you should be especially careful with brainwallet, i.e. storing data in your own memory, or in a paper crypto-wallet – on paper). Remember the story about British miner, who by mistake threw away his hard drive with 7,500 bitcoins, mined during 4 years, to a landfill in the middle of 2013.

Also you may like >  What is Polkadot?

In addition, non-custodial cryptocurrencies are also of interest to attackers. For example, in the spring of 2018, the popular non-custodial Ethereum wallet MyEtherWallet lost 216 ethers to customers due to an attack on the DNS server: hackers redirected users to a phishing site and gained access to their private keys.

Hardware-based cryptocurrencies (Ledger, TREZOR, BitFreezer, KeepKey, Cool Wallet, Digital Box) are considered some of the most effective and secure, though they can also have code vulnerabilities, be physically compromised or lost.

6. How should you work with a crypto wallet?

  • Save keys with password managers (LastPass, 1Password), and non-crypto wallet passwords in different ways in several secure places.
  • To protect against phishing, access web wallets using the links you’ve saved in your bookmarks. If you enter addresses manually, it’s better to do it in a new browser tab and with careful double-checking of all the characters.
  • Determine for what tasks you need crypto-assets – and to minimize risks, divide them into several self-studied crypto-purses.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may also like