Understanding the difference between custodial and self-custodial wallets is an essential part of keeping your crypto secure for years to come.
The term custodial wallet means there is a custodian, like Coinbase, who can access the cryptocurrency in your wallet. These centralized services have control over their users’ crypto, and this can lead to some pretty bad outcomes.
For example, Coinbase recently released a document suggesting that in the event of a bankruptcy, the exchange might use customer deposits to pay off creditors. Celsius is another great example of why custodial wallets can be dangerous. The centralized lending and borrowing service, with more than $10 billion in assets, recently blocked all customer withdrawals. Due to an overinvestment in staked Ethereum, and a large loan on MakerDAO, Celsius doesn’t have enough liquid assets to give everyone their money back. It’s now unclear when or if Celsius will allow their customers to access to their own money. As you can see, when you use a custodial wallet you don’t have full control of your crypto. A non-custodial wallet is the opposite.
Non or self-custodial means there’s no need for a custodian or third party to have access to your cryptocurrency. That’s because the private keys to your wallet are stored directly with you. The only thing you have to do to keep your wallet safe is to protect your password and your 12 or 24 word seed phrase, which allows you to restore your wallet on any device. Exodus is a great example of a self-custodial wallet. No matter what happens, Exodus can never access any of your crypto or stop you from transacting with it. Hardware wallets are also non-custodial, and they’re one of the safest ways to store cryptocurrency. To send crypto from a hardware wallet a user has to push a button on the device, which guarantees that a hardware wallet is almost impossible to hack. Not your keys, not your coins, is a common phrase in the blockchain community.
Using a non-custodial wallet is the only way to hold your private keys and take complete control over the coins in your wallet. One of the best things about crypto is that for the first time in history, people have full control over their digital assets. With cryptocurrency you can be your own bank, but only if you’re willing to be your own custodian!
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