Comparing Custodial, Non-Custodial and Self-Custodial Wallets
When storing crypto, there are three main types of wallets: custodial, non-custodial, and self-custodial. Learn the difference between the three and choose the best option for you.
Custody is the legal relationship between a person who owns the property and the person who has the right to possess or use it. For a society to grow, people specialize in different trades and professions. We can't all be everything all at once, and so we need to delegate some tasks to others. Especially when it comes to our money, we like to have the option to entrust it to someone else for safekeeping.
With cash or any other type of savings, most people opt to do so. The custodian, in this case, the bank, takes on the responsibility of safeguarding your money. And while it's possible to self-custody your cash, it's generally more convenient (and less risky) to let someone else do it.
Bitcoin is the first digital money to give users full custodial control over their funds. After purchasing bitcoin, the next step is deciding where to hold your assets. Some people want full control, but others are happy to delegate custodianship to a third party. There are three main types of custody solutions for cryptocurrency: custodial, non-custodial, and self-custodial. Let's take a closer look at each.
At NOAH, we believe that every individual should be able to maintain complete control over their funds, which is why we made our app non-custodial.
All financial services are custodial—you as a customer relinquish property rights to a custodian. The custodian, in turn, promises to take care of the property and return it when you ask for it.
Custodial wallets are managed by third parties such as Coinbase, Gemini, or Binance. They hold your private keys on your behalf and are custodians of your funds. Custodial wallets are generally more user-friendly than non-custodial wallets (although we think the NOAH app is pretty easy to use). They require less technical know-how, but they come with the tradeoff of slightly less security. Because you're trusting a third party with your private keys, there's always the possibility that a hacker could access those keys and gain access to all your funds.
In other instances of political or economic uncertainty, there's always the possibility of your custodian freezing your assets. At times, third parties have been known to suspend accounts, wallets, and even crypto trading for an arbitrary reason — so that's something you'll want to keep in mind. It's a common saying in the crypto community: "Not your keys, not your coins."
With a self-custodial wallet, you have sole control over your private keys. Private keys are essentially the password to your crypto account. They're typically in the form of a 24-word phrase that you're given when you set up your wallet. If you lose your private keys, you lose access to your account and your crypto.
With self-custodial wallets, you are in control of your funds, which means you are also responsible for keeping your private key secure, as well as any backups of your wallet. Self-custodial wallets give you the freedom to move your funds at your unbridled discretion, interact with other cryptocurrencies, and use decentralized exchanges. Self-custodial wallets come in different forms, namely hardware wallets such as a Ledger or Trezor. But they also come in software forms such as a desktop or mobile wallet.
Non-custodial wallets bridge the gap between custodial and self-custodial wallets. With non-custodial wallets, there is no single entity that has control over your private keys. Put simply, your private keys are sharded and spread out among different servers. There is no single entity that has control over all the shards, which makes it impossible for any one actor to hijack control.
Typically, fund management happens through multi-sig, which is an arrangement that requires more than one person to sign off on a transaction. For example, you could set up a 2-of-3 multi-sig, which means that two out of three people would need to sign off on a transaction for it to go through. This could be you and a friend, you and your spouse, or you and a service provider.
Non-custodial wallets marry the custodial ease of use with the security of a self-custodial wallet. They're often easier to use than self-custodial wallets, as you don't need to worry about securely storing your private keys. However, they're more secure than custodial wallets, as there's no single entity that has control over your private keys.
At NOAH, we believe that every individual should be able to maintain complete control over their funds, which is why we made our app non-custodial. As a user, you get to use a simple interface to track all your assets in one place. But under the hood, we use sharded private keys and multi-sig to ensure that only you have control over your account.
Which One to Choose?
When choosing between a custodial or non-custodial wallet, consider what level of control and security you are comfortable with. If you are new to crypto, custodial wallets might be a good place to start. Many around the world, especially those not tech-savvy, are choosing custodial wallets because of their usability and convenience. As you gain experience with crypto, you might find the freedom of a custodial wallet to be too constricting. As cryptocurrency evolves, so will your preferences and willingness to interact with third-party custodians.
At the end of the day, it's your money and your choice. As long as you've done due diligence on both types of wallets, then you'll be ready for whatever wallet comes your way in the future. That's the beauty of crypto; the choice is always yours.