While non-custodial wallets offer users control over their assets, they share a common feature with custodial wallets: they need internet connectivity to function, which leads us to the next criteria for the classification of wallets. Also, if the individual loses their private keys, they’ve lost their funds. ![]() In the event that they (un)willingly give another party their private keys, they cede control to this party. They have the sole duty of storing, managing, and protecting their funds. With a non-custodial wallet, a user holds the private keys and thus has full control over their assets. Anti-crypto governments have exploited this loophole to seize crypto assets of individuals or groups, which is why crypto users prefer non-custodial wallets-a wallet that gives them control. The exchange can, however, decide not to complete the transaction. Furthermore, the user has to rely on the exchange service to complete their crypto transactions. While the user is relieved of the burden of finding a secure way to protect their private keys, they risk losing their funds to hacks, censorship, or seizure. By registering with and storing their funds on a custodial wallet, the user trusts the exchange to keep their assets safe. ![]() This means that the user has no control over the keys. The exchange (third party) holds and manages the wallet’s private keys. Custodial WalletsĪ custodial wallet is a service often offered by centralized exchanges. Custodial vs Non-Custodial Crypto Walletsĭepending on who holds the private keys, a wallet can be custodial or non-custodial, and there are benefits and drawbacks to consider when deciding on the right one based on your individual needs. Wallets can be classified in two ways: either based on where the private keys are stored or whether they are connected to the internet. The public key, on the other hand, is a string of alphanumeric characters used to send or receive funds into the wallet. Losing one’s private keys means losing one’s wallet and the assets therein. The private keys allow the user to access and control their crypto assets. Usually, wallets contain two types of keys: the private keys and the public key (also called the wallet address). Technically, however, its first function isn’t to store cryptocurrencies rather, it holds the private keys that give access to the cryptocurrencies. In simple terms, a crypto wallet is a digital vault for storing any of the hundreds of popular cryptocurrencies available on the market. If you store your crypto on an exchange, then you don’t actually have control over your coins, which is why using a “cold” or “hard” wallet (the two are synonymous) is so important, whether you’re a new trader or a more seasoned veteran (in which case you should already know the importance of cold wallets). ![]() As the saying goes, not your keys, not your crypto. In the case of crypto, a major liability is and remains how (or where) a trader stores his or her crypto. Gox hack, the exchange had to suspend trading it remains the biggest Bitcoin heist in history. Since 2011, the crypto world has suffered major hacks, resulting in the loss of millions of dollars worth of crypto assets. Typically, hacks are due to a strategic vulnerability or backdoor attack. However, the latter (security) can be more difficult, especially since crypto scams are growing in number and sophistication. A user can safely navigate the former (volatility) with financial acumen and sound risk management strategies. However, users have to battle two main threats to protect their investments: volatility and security. The crypto industry is a lucrative space.
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