Instant crypto exchanges vs. Custodial crypto exchanges

The crypto space is innovative and still leaves lots of space for experiments. Both newcomers and experienced customers are looking for  the most efficient way to convert their coins. Further we will be discussing the two main types of platforms for exchange as well as their drawbacks and benefits.The two above mentioned types are custodial crypto exchanges and instant exchanges. Let us start with a quick explanation of the terms and the difference between these two ways.

Custodial crypto exchange platforms

Custodial crypto exchange platforms (such as GDAX, Coinbase, Binance, or Kraken), are known for their popularity and massive amounts of crypto moving through. These platforms have received their name, “custodial”, because during the time of exchange the platforms themselves are the ones in possession of a customer’s crypto coins, so they become the custodians of your private keys. The trading process is done off-chain, so it is not verified by the blockchain, which allows transactions to be done quickly but, unfortunately, leads to the lack of general transparency.

Instant crypto exchange platforms

However, custodial platforms are losing their popularity with the rise of instant crypto exchange platforms. In contrast to bigger custodial platforms, instant exchange platforms are more user-friendly and quick. The process of exchange is simplified and can be done without creating an account. The no-account policy is suitable for people who just want to complete a quick trade. Shapeshift is one of the most well-known examples of a non-custodial (instant) exchange service, so are ChangeNOW and Changelly.

Summing up the introductory part, it can be said that the main difference between custodial and non-custodial (instant) crypto exchanges is rather simple - instant exchanges do not hold your coins as they are kept in hot wallets and the process of the trade is simplified.

Furthermore, it is important to understand and consider the most notable pros and cons of each of the methods.

Pros of instant crypto exchanges

The most obvious pro point of non-custodial exchanges is their simplicity. Usually, it requires not more than two actions to start trading. Once a trade is initiated, all the client has to do is sit back, relax and  wait. Also, creating an account is not necessary for most instant exchange platforms. Besides that, instant exchanges allow the client to control the funds by themselves. When custodial exchanges take ahold of your coins (the money is held by the third party in a non-segregated hot wallet belonging to the platform in question), the instant ones allow the client to store the money in their own wallets. Storing the coins in the client’s wallet also makes the exchange and storage safer, as if the platform goes out of business, it does not take one’s funds down with it. There is one more benefit in retaining the coins in a client’s private wallet. Large exchange platforms are often under the attack of hackers, but it is unlikely for the customer to be singled out and hacked when using one’s own wallet and a smaller instant exchange.Beside being safer, instant crypto exchanges also provide more opportunities to exchange exotic tokens as it is legally and technically easier for them to add new currencies.

Pros of custodial crypto exchanges

With all the efficiency of instant exchanges, custodial platforms remain a more secure way. Despite the fact that instant exchanges are more resistant to hacker attacks and less likely to lose one’s money, if the client is not entirely sure in their capabilities and knowledge (or just starting their crypto world explorations), the bigger custodial platforms are more trustworthy to keep your coins in. Custodial exchanges are also better for beginners from the point of the entry level. The use of instant exchanges requires some basic understanding of  how the wallets work as well as it is needed to pre-own some crypto to start working. Custodial platforms are much more welcoming and do not require any preliminary studies. Finally, custodial crypto exchanges are also more developed in the sense of tools. Instant exchanges are rarely equipped with any of the fancier trading tools. This means that there’s no limits, leverage, margin, loans and so on. This review of the strong and weak points of custodial and non-custodial exchanges is generalised but gives the client the main idea about how both of the types of platforms work. To make the choice in favour of one of them it is still needed to evaluate your own knowledge, goals and perspectives.

The overall summary of the mentioned points would sound like the following:

The customers who do not want to trust larger exchanges and desire to keep full control of their money might want to choose smaller instant exchanges. The same rule applies to the customers who want to work with more rare currencies. Also, the use of the instant crypto exchanges by non-advanced clients is not advised (some of the platforms will not even allow it because of the lack of pre-owned coins). If the customer is not against letting the platforms manage their money, needs more developed trading tools or is a beginner, then the choice of custodial exchanges is more justified.