- Custodial Wallets: Custodial wallets give custody of the private key associated with a wallet to a third party, which could create the opportunity for the custodian or other parties to transact with your assets without authorization.
- Non-Custodial Wallets: Non-custodial wallets are those in which you have full control over your digital assets, and you do not have to store your own private keys.
- Drawbacks To Using Custodial Wallets: There are disadvantages to using custodial wallets, such as potential asset loss due to bankruptcy, the capability of crypto exchanges to freeze your wallet holdings and the risk of data breaches.
What Is A Digital Wallet?
A digital wallet is essential for interacting with Bitcoin. It provides various options you can use to secure your bitcoin — but one of the simplest ways is by utilizing a non-custodial wallet. With this type of wallet, you will have full control over your digital assets.
Custodial Vs Non-Custodial Wallets
The most significant difference between these two wallets is that, with a custodial wallet, you are giving control of your bitcoin to a third party, whereas with a non-custodial wallet, you are the one in control. The asset-holding customer can be treated as an unsecured creditor and there is potential for recovery never occurs and the assets being lost.
Advantages Of Custodial Wallets
Using a custodial wallet does not require storage of private keys – all that is required is logging into the wallet with username and password and inputting intended recipient’s public key. In some cases passwords can be reset if forgotten.
Drawbacks To Using Custodial Wallets
There are also some disadvantages when using custodian wallets including potential asset loss due to bankruptcy; freezing capability by crypto exchanges; and risk of data breaches.
Non-Custodal Wallet Overview
With noncustodyal wallets, users have complete control over their digital assets as they do not need to rely on any third parties or trust them with their private keys. This ensures that users have sole authority over their funds and transactions cannot be done without their consent or knowledge. Moreover, users do not need to worry about data breaches as no details are stored externally leaving only user’s personal device vulnerable