A non-custodial wallet is a crypto wallet that gives the user the right to self-custody i.e., the user controls the private keys.
These can be hardware wallets such as Ledger, Ellipal, and Trezor or software wallets like MetaMask, Trust Wallet, or Coinbase Wallet.
Why Self Custody Matters?
Crypto is not like traditional cash which is controlled by a central reserve bank or can get crime insurance. Further, once stolen, it is way more difficult to trace than ordinary financial crimes.
Additionally, there have been cases like FTX where executives deliberately stole customer funds for their own use. Such incidents gave rise to the phrase: “Not your keys, not your coins“. Keys are here being used for private keys that give you access to a wallet.
Therefore, the concept of custodial wallets became popular. These wallets existed before such incidents, but their usage was limited to a few people because some expertise in crypto is required to use and maintain them.
How Non-Custodial Wallets Work?
Non-custodial wallets rely on a cryptographic algorithm to generate public and private keys. Public keys can be shared with others to receive crypto while private keys are used to access your crypto on the blockchain.
Fun Trivia: A cryptocurrency never leaves the blockchain. It is the private keys that you store in your wallet.
Types
Hardware Wallets or Cold Wallets
Hardware wallets are those physical devices that hold your private keys. They have independent hardware and only connect to the internet when there is a need to transfer any cryptocurrency. At other times, these wallets remain powered off to prevent any hacks.
Hardware wallets are also called cold wallets because most of the time, they stay turned off.
These wallets have been highly popular in the world of crypto and blockchain because of two reasons.
- They give a sense of ownership to you, the user.
- They provide you with full custody of your crypto.
Earlier, there were problems with hardware wallets due to bad and faulty hardware. However, these issues have largely been resolved. Additionally, now even if a hardware wallet is lost or corrupted, you can recover it with the seed phrases.
Software Wallets or Hot Wallets
Software wallets, popularly known as Hot wallets, can be downloaded and used as software like MetaMask and Trust wallet. They are also found embedded in exchange accounts like Binance, Coinbase, and OKX.
Custodial software wallets like MetaMask, offer full custody to the end user while non-custodial software wallets like those that come with exchanges
Advantages
Full Ownership
A non-custodial wallet gives you ownership over your crypto in a general sense. These wallets have private keys which can be used to access your funds anytime, anywhere.
Anonymous
All non-custodial wallets are anonymous which means it is very difficult to detect who owns the crypto in a certain address. This gives you peace of mind that your funds are safe and anonymous at all times.
Censorship Resistance
Non-custodial wallets do have a feature that lets you access the private keys so that you can take control of your crypto even if the wallet no longer exists or gets banned.
All you need to do is copy these private keys to a place, physical or digital, where you can access them without any trouble, even after a long time.
ATTENTION!
One thing that no one seems to discuss is that these apps do have some vulnerabilities. In the world of the internet, there is no full custody or even true censorship.
Custodial wallet apps can still be banned or you could be prevented from accessing them via these methods.
- Banning their data servers, a large part of their code still operates from platforms like AWS.
- Banning their websites.
- Banning their customers from accessing these apps through the Google Play Store and the Apple App Store.
So What’s The Solution?
If you have a decent investment in any one crypto, try to become a validator. Most validators have an address attached to their validator nodes that can be accessed from anywhere and are difficult to ban.
If your investments are low or if you do not want the headache to become a validator. Copy the individual private keys of the blockchain addresses and save them in an air-gapped device, say an isolated phone or a Raspberry Pi.
Risks
Losing Private Keys
Many users have lost their crypto just because they forgot their login passwords. One user even lost 8000 Bitcoins because his wife had thrown his hard disk at a landfill. That disk could have been worth over half a billion now.
Also, there is a very high risk of malware stealing your passwords and even private keys.
