Educational Byte: Custodial vs. Non-custodial Crypto Wallets

The first thing you need to know or remember about cryptocurrency wallets is that they’re metaphors: your funds aren’t there, and they never were. Cryptocurrency wallets, custodial and non-custodial, are software or hardware pieces that help you access and manage your coins. It doesn’t really store your funds—your crypto always exists on the distributed ledger.

Instead, the wallet holds your public and private keys, which are like secret passwords that let you prove ownership and send transactions. Think of it like a keychain with actual keys that unlock access to your digital money, rather than a physical wallet that holds cash. Those keys are crucial to open your vault on the ledger, and only one pair exists. The private keys, which enable total control of said vault, are formed by 12 to 24 random words in most networks.

The definition of custodial and non-custodial is about those essential keys. If you have them in your exclusive power, we’re talking about a non-custodial crypto wallet. Nobody else (company or individual) would be able to access and control your funds but yourself, or whoever you trust with your keys. If you don’t have them, and instead use a service with an account (typically with email and a common password), then your wallet is custodial —in custody of someone else.

Some online wallets like Blockchain.com and Freewallet, and centralized crypto exchanges like Coinbase and Binance are considered custodial wallets. Meanwhile, downloadable apps like MetaMask or Exodus, and physical devices like Trezor and Ledger are considered non-custodial wallets. If you write down your private keys on a piece of paper, that also counts as non-custodial.

Autonomy vs. Simplicity

While custodians (companies and teams) in custodial wallets technically have full control over the funds, regulations often prevent them from misusing them, similar to how banks operate. However, they’re still vulnerable to risks like hacking, insolvency, insider fraud, or government intervention, which could lead to the loss or freezing of assets —Mt. Gox and FTX are big examples of that.

On the positive side, custodial wallets are much easier for beginners, offering user-friendly interfaces. They eliminate the need to manage private keys, and users can recover access with simple identity verification. Some custodial services also offer high liquidity for trading, allowing for quick conversions between different cryptocurrencies.

On the other hand, the autonomy offered by non-custodial wallets means that no one can freeze, censor, or seize assets, but it also places full responsibility on the user. If a private key is lost, the funds are gone forever, with no way to recover them. Additionally, some non-custodial wallets may have a steeper learning curve than custodial ones, requiring users to carefully handle security practices.

However, they offer key advantages, such as the ability to restore funds on any other non-custodial wallet and a stronger security, since there’s no central authority vulnerable to hacks (or waiting to steal your funds). Non-custodial wallets also enable direct interactions with decentralized applications (Dapps), allowing users to engage with DeFi platforms, NFT marketplaces, and on-chain services without intermediaries.

Ultimately, choosing between custodial and non-custodial wallets depends on personal needs. Beginners who prioritize ease of use and don’t want to manage private keys may find custodial wallets more convenient, while experienced users who value financial sovereignty and security will likely prefer non-custodial solutions.

Wallets in Obyte

The main Obyte wallet is a non-custodial, user-friendly option that gives users full control over their funds. Since private keys and data are stored only on the user’s device, no third party can freeze or access the funds. Transactions are recorded directly on Obyte’s decentralized DAG (Directed Acyclic Graph), ensuring censorship resistance.

Besides, the wallet includes advanced security and privacy features like Tor integration for anonymous transactions, spending restrictions, password protection, two-factor authentication (2FA), and data backups. Despite being non-custodial, it also provides access to built-in chatbots that allow users to interact with services offered by middlemen, such as identity verification (attestations) that can be useful for certain applications.

Beyond the main wallet, the native currency of Obyte, GBYTE, is listed on centralized exchanges like Biconomy and NonKYC, which function as custodial wallets when users deposit funds. These platforms may have their own restrictions, such as full identity verification on Biconomy or withdrawal threshold on NonKYC.

Another feature to consider is the exportation to other ecosystems. While the main Obyte wallet only supports Obyte-based assets, users can bridge these assets to other networks, like Ethereum or Polygon, using the Counterstake Bridge. In this case, the receiving wallet would be MetaMask, another non-custodial wallet that has its own security settings, including seed phrase backups and hardware wallet integration.

Since Obyte users may need to switch between different wallets depending on their needs, caution is recommended. While custodial platforms can be convenient, they also carry risks like restrictions, hacks, or insolvency. For maximum security, it’s best to keep most funds in non-custodial wallets, where users have full ownership and control.

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