Understanding custodial and non-custodial crypto wallets
July 16, 2022
5 min read
Whether you’re a seasoned crypto user or someone interested in learning about the Web3 space, it’s essential to know how your crypto is stored. There are many different types of cryptos wallets that you can use to store cryptocurrencies and NFTs. Generally, they fall into two broad categories: custodial and non-custodial.
A custodial wallet, like the ones used on the Enshrine platform, is a service that owns controls the private key to your wallet and holds your assets in their custody. A non-custodial wallet is one where you have complete control over its functionality and assume all the responsibility of keeping that information safe.
Custodial and non-custodial wallets have their advantages and disadvantages. Let’s explore their differences so that you can better understand how crypto assets are stored.
How crypto wallets work
A crypto wallet is a tool that allows you to interact with a blockchain network. While there are many things you can do with a crypto wallet, you’ll mainly use it to send and receive cryptocurrencies/NFTs (if the wallet supports them) and to interact with decentralized applications (DApps).
Unlike a physical wallet that you use to store your Driver’s License, credit cards, and cash, a crypto wallet doesn’t technically hold your digital assets. Instead, wallets generate the information required to use crypto. For simplicity, we’ll say that crypto-assets store your digital tokens.
A crypto wallet is comprised of two components — a public key and a private key.
Understanding public keys
Like it sounds, the public key of a wallet is the public-facing (it’s safe for others to see it) hash that generates addresses. When someone wants to send you crypto, they will send it to one of your addresses.
The process of address generation is a bit too complex for this article. To learn more about public key cryptography, check out Binance’s article.
Understanding private keys
A wallet’s private key is essentially the password that grants someone access to the wallet’s assets and gives them the ability to sign transactions. As such, a private key should be treated as confidential information that should never be shared.
The private key is responsible for signing transactions and allowing users to access the crypto assets from any device.
Many security experts recommend that private keys be written down on something that isn’t online such as a piece of paper or another physical medium. Another good alternative is a hardware wallet — a physical device that can be plugged into a computer when the crypto assets need to be accessed. The user does not need to enter their private key when using a hardware wallet.
Regardless of which specific wallet, it will either be a custodial or a non-custodial wallet.
What is a custodial crypto wallet?
A custodial crypto wallet is one where your crypto assets are held for you. This means that a third-party institution (typically an exchange, marketplace, or another platform) owns and manages your private keys on your behalf.
In this case, you won’t have the ability to sign transactions yourself. Instead, the third-party institution will give you some way to initiate transactions and handle the signatures themselves.
Why would someone use a custodial crypto wallet?
In the early days of Bitcoin, every crypto user had to create and manage their crypto wallets and private keys. While this offers many benefits, mainly more control over your assets, it is also more complicated and riskier for users to manage this themselves.
When you use a custodial wallet, you allow a third party to manage your crypto wallet and private keys and will typically have an account with this third party. If you forget the password to the third-party site, you’ll typically be able to recover it by talking with customer support.
While using a custodial wallet does mean you give up some control over your private keys, you mitigate the risk of losing or mishandling your private keys.
What is a non-custodial crypto wallet?
A non-custodial crypto wallet is where the user owns and controls their private keys. This means that the user has complete control over their funds and can sign transactions. When using a non-custodial wallet, users typically use a service like MetaMask since it has a browser extension and is widely trusted in the crypto community.
Why would someone use a non-custodial crypto wallet?
A non-custodial wallet is typically recommended for experienced users who know how to manage their wallets and protect their private keys adequately. If you want to interact with decentralized exchanges and DApps, you’ll need a non-custodial wallet to do so.
Before putting any funds in a non-custodial wallet, we strongly recommend that you learn how to properly store private keys and ensure you only interact with trusted DApps.
Why Enshrine uses custodial wallets
When creating Enshrine, we put a lot of thought into whether or not we wanted to use custodial wallets. Having an easy-to-use platform and a seamless customer experience is extremely important to us. There are three key reasons why we decided to use custodial wallets:
We want our platform to be easy to use for everyone, not just those well-versed in the crypto world. To buy and sell NFTs and crypto on most platforms, a user needs to know how to create a wallet, convert fiat to crypto, and conduct the transaction. Due to identity verification requirements, this process can take several days to weeks.
We want to make the NFT minting and transfer process simple and seamless. While most DApps and decentralized exchanges are relatively easy to use, users still have to know how much gas to use for a transfer, how to read the blockchain transaction logs, and how to sign a transaction.
We want to ensure that our users’ purchased tokens are secure on our platform. Enshrine uses state-of-the-art security techniques to store users’ private keys. We also keep assets in cold storage when possible to further reduce the risk of bad actors.
In the future, we plan on either allowing users to bring their own wallets if they choose to and allowing users to transfer their assets off Enshrine easily.