What is a castodial wallet and noncastodial wallet?

When it comes to using cryptocurrency, the most important thing is to own a crypto wallet. It’s required not only to store funds, but also to perform any operations with assets. Today we will talk about custodial and noncustodial wallets and will determine the type of wallet you need for your personal use and security.

What is a custodial wallet and noncustodial wallet?

A custodial wallet is a wallet in which your private keys are stored by a third party (for example, an exchange). This way you don’t have total control over your funds, and it makes the choice of this kind of wallet somewhat dubious.

At the same time this wallet has the following advantages:

  • you can manage your funds very quickly anytime from any device with the Internet connection;
  • low risk of losing access to your funds.

The main disadvantages of such wallets are:

  • you can manage your funds, but so can operator;
  • funds on your account can be withdrawn by decision of a court;
  • you wallet can be hacked.

This wallet in its function is very much like bank instruments – you don’t completely control your money inside it. Sure, you own your money, but they are in the hands of a different company.

Here are a few examples of custodial services that provide you with a wallet to store your funds on their side:

  1. Bitfinex is one of the largest companies in cryptocurrency space. However, in 2016, Bitfinex suffered the biggest ever disaster when hackers stole 120,000 Bitcoins, and Bitfinex had use their operating revenue to pay compensations to its users.
  2. Bithumb is a Korean cryptocurrency exchange service. It supports 10 cryptocurrencies and is one of the leaders in trading volume per day. In 2017, the service was hacked, 1.2 million Korean won was stolen from user accounts.
  3. Cryptsy is an American crypto exchange founded by Paul Vernon. The platform traded Bitcoins and Litecoins. The service was eventually hacked, the hackers took possession of over $5 million.
  4. Coinbase is the largest cryptocurrency exchange which also suffered a hacker attack.
  5. Mt.Gox is the infamous crypto exchange, among the first on the market and worst hit by hackers, who made $8 million disappear from user accounts.
  6. BTC-e is the largest Russian exchange. In July 2017, it stopped working unexpectedly, and its director was arrested.
  7. Poloniex is quite a well-known large exchange with over 100 cryptocurrencies for trading. In 2018, it suffered a huge hacker attack when the thieves tried to get hold of user accounts.
  8. Kraken is an American exchange with 2F authorization. However, during 2018, some of its clients were hacked.

These days, several types of multi-currency crypto wallets are used to store cryptocurrencies on the crypto exchange account:

  1. Freewallet – within the platform, Freewallet users can create mobile crypto wallets to work with tokens. It can store various options of cryptocurrencies (Bitcoins and Altcoins). In 2017, users started to complain that Freewallet sent its money to unknown addresses.
  2. Blockchain.info is a partially centrilized wallet. However, it also suffered several major thefts.
  3. BTC.com – this mobile app was the first of a kind, unlike software for desktop computers, it was specifically designed for tablets and smartphones. The client connects directly to the network, and that eliminates the possibility of third parties getting your confidential data and access to existing assets.

Noncustodial wallets are safer because you yourself control movements of your funds. This kind of wallets are:

  • web wallets;
  • paper wallets;
  • mobile wallets;
  • desktop wallets;
  • hardware wallets.

Web wallets are stored in your web browser. You can access your account from any device entering your private key.

Hardware wallet is considered to be the safest way to store cryptocurrency. The wallet is a device resembling a flash drive. It has no access to the Internet, that’s why hackers can’t remotely get access to your account.

Mobile wallets are installed on a smartphone or a tablet. There are numerous wallets of this sort, but you have to be careful which Bitcoin wallet to choose, paying attention to safety and authenticity of a wallet. Read comments before you install a wallet. If you install an app from a developer’s website, the risk of downloading a fake app is eliminated.

Desktop wallet is a software installed on your computer. Currently there are several digital solutions of this kind, depending on what cryptocurrency you want to store and the operating system of your computer. You can use this wallet only if you have an Internet connection. But since the keys are stored on the computer itself, there’s a possibility of theft if a hacker gets into your computer.

With paper wallets, you print your public and private keys on a sheet of paper. This way your cryptocurrency is stored offline, but you can connect to the Internet from any device and enter your keys. Storing cryptocurrency on paper is like keeping your money in a piggy bank.

Summing it all up, a noncustodial wallet is the easiest way to use cryptocurrency and it doesn’t require special skills to use, but it’s very unsafe. So if you plan on storing big sums of money, you should better choose a light wallet.