What is a non-custodial wallet, and why is it seen to be the safest way to store digital assets?
Since you have total control over your private keys using a non-custodial wallet, it is believed to be the most secure method of managing cryptocurrencies and DeFi.
Non-custodial technology offers advantages beyond long-term bitcoin storage. Thanks to non-custodial technology, it is now possible to conduct peer-to-peer transactions and earn interest using DeFi protocols without giving up control of your money.
A custodial wallet, in contrast, follows the same paradigm as conventional financial products: When you keep your cryptocurrency with a custodian, they remain in charge of your private keys and, consequently, of your assets.
What is a cryptocurrency wallet?
Contrary to popular belief, a wallet doesn’t really hold your bitcoin. Instead, it keeps the public and private keys needed to interact with your blockchain-based digital assets.
A key is a string of characters and digits produced by cryptography that enables the sending and receiving of cryptocurrency.
- Everyone has access to public keys. A public key is similar to a one-way street in that it can only be used to send and receive bitcoin.
- Private keys are used to demonstrate ownership of certain blockchain assets, allowing you to authorize transactions. Never give anyone your secret keys.
You must “sign a transaction” by generating a digital signature from your wallet in order to transmit bitcoin. This can only be accomplished by utilizing a private key. This procedure is abstracted away when you keep your bitcoin with a custodian (they sign your transactions with your keys).
The actual assets are kept on the blockchain, which may be compared to a public ledger.
An explanation of non-custodial wallets
Your public and private keys can be kept in a non-custodial wallet so that only you can access them. Usually, it appears as a browser extension, a piece of mobile or desktop software, or a hard wallet—a real-world object the size of a USB stick.
The main advantage of adopting this sort of storage is security: Since you are the only one with access to your private keys, no transaction can be approved without your knowledge.
You are in charge of keeping your keys safe while using a non-custodial wallet. There could be no way to get your money back if you lose your private keys, password, seed phrase, or even your wallet, depending on the product.
Non-custodial technology gives you control over your money
It is difficult to emphasize the paradigm change that non-custodial technology implies for the financial services industry. People have had to put their confidence in centralized, independent organizations like banks to use financial goods since since Babylonian times.
Your bank still has authority over your assets today. Even if the money in your savings account is theoretically yours, you must ask your bank for permission to use it, and they have the right to refuse.
The ability to manage your money while interacting with financial goods is now possible for the first time in human history with a non-custodial wallet. Without granting a third party custody of your money, you may earn interest, borrow and lend money, and support exchanges with liquidity.
Custodial vs. non-custodial wallet
Generally speaking, you’re employing a custodial service if you don’t know where your bitcoin is kept. Your default storage type when you buy cryptocurrencies through an exchange is often custodial, which means that the exchange holds “custody” of your private keys.
Non-custodial wallet
• Advantages: security and transparency
• Risks include misplacing your private device or key.
• Format: hardware or software (hot wallet) (cold wallet)
• Examples: Trezor, Magic, MetaMask, Ledger
Cust
Custodial wallet
• Benefits: cost and convenience
• Hacking, fraud, and custodial data leak are risks.
• Format: online
• Example: Gemini, Binance, and Coinbase
Holding your private keys
Most knowledgeable bitcoin users recommend keeping your own private keys for security purposes.
Decentralized assets like cryptocurrencies are among of the most secure by design because they are protected by blockchain technology, an unalterable ledger dispersed over thousands of nodes throughout the world.
Cryptocurrency hacks predominately take place on controlled systems. Sensitive client data is kept in large quantities by centralized third parties, such exchanges.
Cold vs hot storage
Solutions for self-custodial situations come in several forms. These may often be classified into two categories: cold storage and hot storage (software and browser extensions) (physical devices).
Non-custodial software wallets (hot storage)
A software wallet is a form of non-custodial storage that enables you to keep control of your private keys. It is also referred to as a “hot wallet” since it is linked to the internet.
- Benefits: Simple to use for accessing DeFi, buying and selling bitcoins, and storing NFTs.
- Having an internet connection makes it less secure than cold storage.
- Format: desktop software, mobile applications, and browser add-ons
- Example: MetaMask, Coinomi, and Edge
Cons: A software wallet is less secure than a hardware option since it is connected to the internet. However, some allow you to add extra security precautions, including two-factor authentication (2FA).
Non-custodial hardware wallets (cold storage)
- Benefits: most secure method of storing cryptocurrencies; potential immunity to computer viruses.
- Disadvantages: Inability to use DeFi, more difficult to access cash, and possibility of losing the actual device.
- Format: a small physical object resembling a USB drive
- Examples: Trezor, Ledger
A hard wallet, often known as cold storage because it’s offline, is a tangible object that encrypts your private keys. Although it has significant drawbacks, it is seen to be the safest option to hold blockchain assets.
Advantages: Despite varying in their features, hard wallets are not intended for use with DeFi or for routine bitcoin purchases, transfers, and exchanges. Additionally, there is a chance that you will misplace or harm your physical non-custodial wallet.
