Custodial vs. Non-Custodial Wallets

tag: [Engineer/Developer, Security Specialist]

Custodial Wallets

What Are They?

Custodial wallets are managed by a third party, such as an exchange or a wallet service provider. The third party holds and manages the private keys on behalf of the user.

Characteristics

• Managed Private Keys: The third party has control over the private keys.
• Recovery Options: Easier to recover access if credentials are lost, as the third party can assist.
• Security Dependence: Security depends on the third party’s practices and infrastructure.

Use Cases

• New Users: Suitable for users who are new to cryptocurrency and prefer a simpler, managed solution.
• Convenience: Ideal for users who prioritize convenience and ease of use over full control.

Non-Custodial Wallets

What Are They?

Non-custodial wallets are managed by the user, who has full control over their private keys. The user is responsible for the security and management of their keys.

Characteristics

• User-Controlled Private Keys: The user has full control over their private keys.
• Higher Security: Greater security and privacy, as only the user has access to the keys.
• Responsibility: The user is solely responsible for backing up and securing their keys.

Use Cases

• Experienced Users: Suitable for users who have a good understanding of cryptocurrency and key management.
• Security Prioritization: Ideal for users who prioritize security and control over convenience.

Comparison