November 27, 2022


As crypto ownership becomes more and more common, holders need to think about how they protect and hold their assets. The safest option is to store cryptocurrency in a personal wallet.

Crypto wallets are programs that allow users to store, send, and receive cryptocurrencies. Each wallet has a private key that allows the wallet to be spent. Private keys are cryptographic strings of code that allow owners to spend funds inside a wallet as well as prove ownership. Wallet information is also stored offline, reducing the risk of hacking attempts Everyday non-technical crypto users can benefit from the increased security, but it may come at the cost of convenience, depending on their needs.

What is a custodial wallet?

A custodial wallet is a type of online cryptocurrency wallet that is managed by a third party, such as an exchange, after users make their first cryptocurrency purchase. In other words, the exchange is the custodian, responsible for keeping the user’s cash safe and tracking the keys. The majority of client funds are held in cold storage hardware wallets at major US crypto exchanges.

A custodial wallet is less secure than a non-custodial wallet. Nevertheless, many people still choose them because they are easy to use and involve less responsibility If users forget their password for their exchange account, they can probably reset it through the established identity verification process.

What is a non-custodial wallet?

With a non-custodial cryptocurrency wallet, users are the sole custodians of their private keys and, therefore, the assets being stored. Non-custodial wallets as they remove the need for a trusted third party and, in some cases, are more secure than custodial wallets.

There are different types of non-custodial wallets, including browser-based, software wallets for mobile phones and computers, and hardware wallets. Hardware wallets, which come in a variety of formats, are said to offer the highest level of security for storing crypto. These digital currency wallets are similar to USB drives but instead have a display and physical buttons.

Hiccups with non-custodial wallets

Setting up a non-custodial wallet is easy. For software non-custodial wallets, holders must download the wallet, back up the recovery seed phrase, or set a key and a password consisting of a 12-, 18- or 24-word string of random words.

Additionally, if users forget their passwords, the seed phrase acts as a backup through which they can still access their assets.

Beyond that, there is little support for hardware wallet users if users lose their keys or fail to take the necessary operational security measures to protect passwords and keys. If a user loses, deletes or forgets their key, they risk losing access to their funds entirely.

Therefore, to adequately protect this information, non-custodial wallet users must take additional measures to ensure passwords and wallets are secure.

Related: Simple steps to keep your crypto safe

When securing seed phrases, the general advice for users is to write them down on a piece of paper and store them in a safe place However, it is generally not recommended that users store seed phrases in text files on their personal computers or mobile devices. For example, personal computers and Android devices are susceptible to viruses, while notes stored on iPhones can be compromised if a user’s iCloud account is hacked. So instead, the best practice to keep seed phrases safe is to keep them offline.

There are additional methods users can take to protect their seed phrases. For example, Serenity Shield is a digital storage platform that enables users to recover their seed phrases in case of loss through the Strongbox feature. The seed information is contained in the blockchain as a non-transferable nonfungible token (NFT). Thus, only the owner can access and read the information stored within the Strongbox.

Aside from concerns about keeping them secure, the mechanics of sending transactions to non-custodial wallets can also be challenging for crypto newbies.

Most non-custodial wallets require users to pay for transactions using the network’s native cryptocurrency on which tokens are built. For example, if a user wants to transfer Tether (USDT) to Ethereum, they need to have Ether (ETH) in their wallet to pay for gas. So, users need to buy ETH, then move it to their wallet before they transfer USDT.

However, hot wallets on exchanges enable users to pay for transactions using the same token. For example, cryptocurrency exchange Binance enables users to pay for Tether transactions using USDT instead of ETH, or using other network tokens such as BNB or Tron (TRX). Since users do not have to hold the network’s native tokens, token transfers are simplified.

Some people in the crypto space believe that non-custodial wallets are still not practical for everyday users who may not be concerned with backing up their own private keys.

Hsuan Li, CEO of Porto, the developer of the Blocko multichain wallet, told Cointelegraph that when a new user “gets their hands on a blockchain app for the first time, they can’t care less if they hold the keys themselves, they just want to. Get started early.”

Rodolphe Seynat, co-founder of Serenity Shield – a digital storage and privacy platform – told Cointelegraph, “Non-custodial wallets have a long way to go before they can be considered a viable option for everyday use. Cryptocurrencies need to be more widely adopted so that they reach the average retail A simple use case for the user can be provided,” adds:

“That said, I strongly believe that non-custodial wallets remain a safer, more secure and more private way for users to manage their assets and better position themselves for the future.”

User friendly?

Wallet providers have worked to make them more user-friendly over time. For example, both custodial and non-custodial wallets remind users to double-check destination addresses to avoid losing funds. There is even an option to automatically copy an address using a button to further reduce the chances of any mistakes in the transfer process.

Also, solutions like Coinbase Wallet enable users to set a username when creating a new wallet. Usernames make it easier for people to send and receive crypto because they are easy to remember, resulting in fewer mistakes when transferring funds. The wallet allows the user to decide whether they want their wallet to be public (other Coinbase wallet users can search their username) or private.

Regarding crypto transactions, low fees usually mean long transaction times due to low priority of miners, while high fees mean fast speed and users are widely unaware of it. Therefore, many crypto wallets have transaction fees preset at a moderate level, allowing the user to send a transaction with an average transaction time.

So, sending tokens with a non-custodial wallet can be frustrating for the average, non-technical user. In cases where users expect to send tokens regularly, they may find a custodial wallet more convenient. On the other hand, when it comes to long-term storage and safekeeping, non-custodial wallets are the best choice, as long as the seed phrase is protected.