October 1, 2022

As cryptocurrency ownership becomes more common, owners will 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 cryptocurrency. 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 within a wallet, as well as proof of 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 keeping track of the keys. The majority of client money is held in cold storage hardware wallets on major crypto exchanges in the United States.

A custodial wallet is less secure than a non-custodial wallet. However, many people still choose them because they are easier to use and involve less responsibility. If users forget their exchange account password, they can likely reset it through established identity verification processes.

What is a non-custodial wallet?

With a non-custodial cryptocurrency wallet, users are the sole custodians of their private keys and thus the assets being stored. A non-custodial wallet because it removes the need for a trusted third party and is, in some respects, more secure than custodial wallets.

There are many different types of non-custodial wallets, including browser-based, mobile and desktop software wallets, and hardware wallets. Hardware wallets, which come in a variety of formats, are said to provide the highest level of security for storing cryptocurrencies. These digital currency wallets resemble USB drives, but instead have a screen and physical buttons.

Hiccups with non-prison wallets

Non-custodial wallets are easy to set up. For non-custodial software wallets, owners need to download the wallet, back up an initial recovery phrase or key consisting of a 12-, 18-, or 24-word string of random words, and set a password.

Furthermore, if users forget their password, the seed phrase serves as a backup by which they can still access their funds.

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

Therefore, in order to adequately protect this information, non-custodial wallet users must take additional measures to ensure password and wallet security.

Related: Simple steps to keep your cryptocurrency safe

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

There are additional methods users can take to secure their source phrases. For example, Serenity Shield is a digital storage platform that allows users to recover their original catchphrases in case of loss through its Strongbox feature. The initial information is on the blockchain as a non-transferable non-volatile token (NFT). This way, only the owner can access and read the information stored in Strongbox.

Aside from their security concerns, the mechanics of sending transactions to non-custodial wallets can also be a challenge for crypto newcomers.

Most custodial wallets require users to pay for transactions using the native cryptocurrency of the network on which the token is built. For example, if a user wants to transfer Tether (USDT) to Ethereum, they must have Ether (ETH) in their wallet to pay for gas. So users will have to buy ETH and then move it to their wallet before they can transfer USDT.

However, hot wallets on exchanges allow users to pay for transactions using the same token. For example, cryptocurrency exchange Binance allows users to pay for Tether transactions using USDT instead of ETH or tokens from other networks it operates on such as BNB or Tron (TRX). Since users do not need to hold the network’s native token, token transfer is simplified.

Some in the crypto space believe that non-custodial wallets are still not practical for ordinary users who may not care about backing up their own private keys.

Hsuan Lee, CEO of Porto, which developed the Blocto multichain wallet, told Cointelegraph that when a new user “gets their hands on a blockchain app for the first time, they can’t care if they hold the keys themselves, they just want to get started quickly.”

Rodolphe Seynat, co-founder of Serenity Shield β€” a digital storage and privacy platform β€” told Cointelegraph: β€œNon-custodial wallets have a long way to go before they can be considered viable options for everyday use. There would have to be a wider adoption of cryptocurrency to give them mainstream use for the average retail user,” adding:

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

User friendly?

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

In addition, solutions such as Coinbase Wallet allow users to set usernames when creating a new wallet. Usernames make it easier for people to send and receive cryptocurrencies because they are easier to remember, leading to fewer errors when transferring funds. The wallet also allows the user to decide whether they want their wallet to be public (other Coinbase wallet users can request their username) or private.

When it comes to crypto transactions, lower fees usually mean longer transaction times due to lower miner priority, while higher fees mean faster speeds and users may not be aware of that. Therefore, many crypto wallets have a pre-set transaction fee at an intermediate level, which allows 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 on a regular basis, a custodial wallet may be more appropriate. On the other hand, when it comes to long-term storage and custody, custodial wallets are the best choice, as long as the seed phrase is kept safe.