Custodial vs. Non-Custodial Wallets: What's the Difference

Ever wondered how and where your crypto is stored? There are many different types of crypto wallets that token holders can use to store crypto. But, they can generally be split into two broad categories: custodial and non-custodial wallets.

A custodial wallet, like Binance Custody, is a service that owns the private key to your wallet and holds your assets in custody. Your regular Binance account is also a custodial wallet. In contrast, if you use a non-custodial wallet, you alone have complete control over your assets. MetaMask and Binance Chain Wallet are examples of non-custodial wallets.

Both custodial and non-custodial wallets have their pros and cons. Let's explore their differences so you can learn when to use one type or the other.

• How crypto wallets work *
  A crypto wallet is a tool that allows you to interact with a blockchain network. Among other things, you can use it to send and receive cryptocurrencies or access decentralized applications (DApps).
  Technically speaking, crypto wallets don't really store your digital assets. Instead, they generate the information you need to use crypto. Still, most users adopt the verb to make it easier for beginners, so we will use the term throughout this article.

Among other things, a crypto wallet is made up of two main components – a public key and a private key.

If people want to send you crypto, they can make a transaction to one of your addresses, generated by your wallet's public key. Your wallet addresses and your public key can be shared with others (hence the term public).
Your private key, however, should be treated as a confidential password because it signs transactions and provides access to your funds. As long as you keep your private key safe, you will be able to access your crypto from any device.

While cryptocurrencies are digital, crypto wallets that hold private and public keys can come in various options – the keys can be printed on a piece of paper, accessed via desktop wallet software, or stored offline in hardware wallet devices.

Some wallets also offer the option of storing and transferring NFTs, which are non-fungible tokens issued on a blockchain.
But regardless of the wallet type, you will always have either a custodial or a non-custodial crypto wallet.

• What is a custodial crypto wallet? *
  As the name suggests, a custodial crypto wallet is one where your assets are held in custody for you. This means a third party will hold and manage your private keys on your behalf. In other words, you won't have full control over your funds - nor the ability to sign transactions. But using a custodial crypto wallet service isn't necessarily a bad thing.

In the early days of Bitcoin, all users had to create and manage their own wallets and private keys. While "being your own bank" brings a lot of benefits, it can be inconvenient and even risky for less experienced users. If your private keys get compromised or lost, you will lose access to your crypto assets permanently. Blockchain analysis reports suggest that over 3 million BTC might be lost forever.

There have also been instances of crypto inheritance being unretrievable because the private keys were held by the original crypto owner alone. You can prevent such incidents from happening by sharing access to your assets with a custodian.

Even if you happen to forget your cryptocurrency exchange password, you should still be able to access your account and assets by contacting customer support. However, if you're using a non-custodial wallet, you are responsible for keeping your crypto safe.

So, in many cases, it makes sense to rely on a custodial wallet service. But, this also means that you are entrusting your private keys to a third party. That's why it's important to choose a reliable exchange or service provider.

Some information to look out for when exploring custody service providers would be whether it is regulated, what types of services you get, how your private keys are stored, and whether there is insurance coverage.

• What is a non-custodial crypto wallet? *
  A non-custodial crypto wallet is a wallet where only the holder possesses and controls the private keys. For users who want full control over their funds, non-custodial wallets are the best option. Since there are no intermediaries, you can trade crypto directly from your wallets. It's a good option for experienced traders and investors, who know how to manage and protect their private keys and seed phrases.

You will need a non-custodial wallet when interacting with a decentralized exchange (DEX) or decentralized application (DApp). Uniswap, SushiSwap, PancakeSwap, and QuickSwa are popular examples of decentralized exchanges that require a non-custodial wallet.
Trust Wallet and MetaMask are great examples of non-custodial wallet service providers. But remember that with these wallets, you are fully responsible for keeping your seed phrase and private keys safe.