The use of custodial and non-custodial wallet - Make a wise decision 😎

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Hello enterpreneurs,
I believe you are all doing great and our various businesses are doing okay.

I am happy to come before this great community again to relate to my fellow enterpreneurs, I also want to apologise for going on a short break, which is as a result of settling some issues with my bank (custodial wallet).

The slight issue I had with my bank prompted me to make this post on custodial and non-custodial wallet, thus enabling enterpreneurs make wise decision on where to save their profits/funds.

Even in the cryptoworld, some exchanges we choose to work with might be operating using a custodial wallet.

Of recent, there's a report made by coinbase exchange, one of the world biggest exchange that says that, the funds of it's customers will be subjected to bankruptcy if the exchange goes bankrupt. For more details on it, visit here.

When I saw this, I decided to let it slide not until I fell victim to a centralized exchange that functions like a custodial wallet, and then I decided to let our entrepreneur know about custodial and non-custodial wallet, so they can make a right decision on which to use.

CUSTODIAL WALLET

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A custodial wallet can be explained to be a wallet which has it private keys in the hands/control of a third party.

This means that a third party has the ultimate control over your funds and you can only give them the permission to make financial transaction.

In other words, you are putting your trust on a third party to help facilitate your financial transactions

The custodial wallet transaction are wallet services operated by a centralized system.
It works in a way that it's users will be offered back up and security, they will also be offered customer support and the chance to recover their funds if they misplace their passwords.

Using Binance exchange as a perfect example, the binance firm are in control of your private keys, which means they control your funds, while you can only have access to your funds through your login details (username, password and 2FA)

ADVANTAGES OF CUSTODIAL WALLET

• One benefit of custodial wallet is that the central authority in charge of your private keys will always provide backup options, which makes it less difficult to undo a transaction.

• One advantage of a custodial wallet is that it is user friendly and very easy to understand.

• There's always room to recover an account even if it's keys are lost

CHALLENGES OF CUSTODIAL WALLET

• NEED FOR KYC:

KYC which is an abbreviation for [Know Your Customer] is another challenge users of custodial wallet face.

Custodial wallet strictly works with kyc and ID verification.
An individual cannot gain access to any activity on the wallet, not even his funds if he has not verified his identity, and this goes against the "anonymity" principle of cryptocurrency.

• CONTROL OF FUNDS:

This is another challenge of custodial wallet, it's users has no autonomy over their wallet.

The third party always have 100% control over the funds of users and they can freeze the account of users whenever they wish.

• THREAT OF DATA BREACH:

Another challenge of custodial exchanges is that it stores a considerable amount of user's funds in hot and cold wallets, and these wallets are very vulnerable to malicious attack.

Such an attack happened in 2014 with a Japanese exchange Mt.Gox, where more than 65% of it's bitcoin transaction were hacked, thus leading to loss of over $400m of user's funds.

• Another challenge of custodial wallet is that it cannot be assessed offline, it needs a strong data connection to be assessed.

NON CUSTODIAL WALLET

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A non-custodial wallet can be explained to be a blockchain wallet that gives users the room to become their own bank.
It gives users 100% control over their funds and private key.

It can also be explained to be a decentralized wallet where the users gets a file containing his private keys, of which he is needed to keep safe, as they cannot be recovered if lost.

This type of wallet give users a direct contact to the blockchain.

BENEFIT OF NON-CUSTODIAL WALLET

• SAFETY IN FUNDING:

This type of wallet is more secured than custodial wallet because all the details associated with user is kept with the user, at such reducing the risk of data breach.

And this is one reason why experience investors make use of non-custodial wallet.

• USER'S CONTROL OVER FUNDS:

The non-custodial wallet provide their users with 100% control over their funds and as such, users don't need the interference of third party over their transaction.

• IMMEDIATE WITHDRAWAL:

This is another advantage of non-custodial wallet.
The non-custodial wallet do not require a confirmation of the third party for every transaction, and this helps to ease the process of withdrawal.
Thus making withdrawals immediate.

• ZERO TRANSACTION FEE:

With the use of custodial wallet, there is always a few attached to sending/receiving of funds(extra fee aside the blockchain fee), which is not true with the use of non-custodial wallet.

CHALLENGES OF NON-CUSTODIAL WALLET

• USER INTERFACE:

The user interface of non-custodial wallet is not always friendly, they are difficult to understand.
They usually require crypto knowledge for it to be understood.

• TRADE DELAY:

Trade delay is another disadvantage of non-custodial wallet, as it is difficult to trade different currencies.
For currencies to be traded, it will have to be sent to an exchange.

• MORE RESPONSIBILITY:

The non-custodial wallet gives more responsibility to their users since they will be accountable for their security.
Remember, users are in control of their private keys and any slightest mistake from the user could lead to loss of their funds.

• LOSS OF KEYS:

Another disadvantage of non-custodial wallet is that once your keys are lost, it cannot be recovered, thus leading to a loss of one's wallet.

There's usually no backup plan loss of keys.

DIFFERENCES BETWEEN CUSTODIAL AND NON-CUSTODIAL WALLET

HEADING	CUSTODIAL	NON-CUSTODIAL
TRANSACTION TYPE	The transaction of a custodial wallet is not always reflected on the on-chain	It's transactions are always recorded on the on-chain.
SECURITY	It's sensitive data is usually stored in cold and hot wallet which is vulnerable to malicious programmers	It's data is not stored in hot/cold wallets, instead they are in the custody of respective users.
PRIVATE KEYS	A third party is usually in control of a user's private key, thus having 100% control over the funds of users	The private key is usually in the custody of the user, thus giving them autonomy over their funds.
RECOVERY POSSIBILITY	It is very easy for an account to be recovered despite loss of password, since the private keys are in the custody of the third party, then the third party which is the owners of the exchange can always generate another password	It is impossible to recover it's account was the private key is lost.
EXAMPLE	Example of custodial wallet are Binance, Bitmex, Bitgo etc	Example of non-custodial wallet are Zengo, Exodus, trust wallet etc.

SOME PRACTICAL EXAMPLES

• Exchange of little tokens:

I went to my steemit wallet to see how little of a token I can swap and I noticed that there is no limit to the amount of token I can swap, since Is a non-custodial wallet.

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As seen above, I exchanged as low as 0.145SBD for it's equivalent steem for free without any external fees.

^{SCREENSHOT FROM BINANCE}

Then proceeding to binance as seen above, I have a total of 14USDT to spare for the transaction but before then I tried to buy steem worth of 5USDT and I wasn't allowed to do so.

I was told that only a limit of 10USDT can be allowed for my transaction to be done.

I the only proceeded to make a transaction of 14USDT and when I did I was charged transaction fee, as seen below.

^{SCREENSHOT FROM BINANCE}

Despite the fact that the transaction was done within it's ecosystem, I still had to pay transaction fee, which cannot be done in a non-custodial wallet.

• KYC VERIFICATION:

Recall I said that the custodial wallet strictly works with kyc verification and without it, a user funds cannot be assessed, take a look at the screenshot below.

^{SCREENSHOT FROM BINANCE}

The above screenshot shows the necessary verification an individual has to pass through inorder to keep his account safe and to operate on a custodial wallet.

Without at least two of the above verification, a user will not be allowed to send funds outside of his wallet which is not so with a non-custodial wallet.

• OFFLINE ACCESSIBILITY:

As I said earlier, a custodial wallet cannot be accessed offline as a user needs to login with his username and password inorder to access his wallet just as seen below.

^{SCREENSHOT FROM BINANCE}

Unlike a non-custodial wallet that can always be assessed offline, take a look at the screenshot below.

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As seen above I could assess my steemit wallet despite being offline.

After all these consideration, here comes the big question.

WHICH IS BETTER

The authority to decide which of the two wallet is better is not bestowed on me, neither is it bestowed on any Individual, it all depends on the individual user to choose and decide which best fits his situation.

The above information clearly shows the advantages and disadvantages of custodial and non-custodial wallet.

Newbies to the cryptoworld might choose to begin with custodial wallet since it has a more friendly user interface, then later they might advance to the use of non-custodial wallet.

Personally, I make use of both custodial and non-custodial wallet and I hope every enterpreneur will make a decision that suites him.

CONCLUSION

Both custodial and non-custodial wallet are nice to use if used carefully, as they both help to secure funds.
They can also be used together, custodial wallet can be used for short time investment while non-custodial wallet can be used for long term investment.

Business	The use of custodial and non-custodial wallet
Username	@jueco
Owner's name	Charles
Location	Lafenwa, ogunstate
About us	Link