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Custodial vs. Non-Custodial Wallets

tag: [Engineer/Developer, Security Specialist]

Custodial Wallets

What Are They?

Custodial wallets are managed by a third party, such as an exchange or a wallet service provider. The third party holds and manages the private keys on behalf of the user.

Characteristics

  • Managed Private Keys: The third party has control over the private keys.
  • Recovery Options: Easier to recover access if credentials are lost, as the third party can assist.
  • Security Dependence: Security depends on the third party’s practices and infrastructure.

Use Cases

  • New Users: Suitable for users who are new to cryptocurrency and prefer a simpler, managed solution.
  • Convenience: Ideal for users who prioritize convenience and ease of use over full control.

Non-Custodial Wallets

What Are They?

Non-custodial wallets are managed by the user, who has full control over their private keys. The user is responsible for the security and management of their keys.

Characteristics

  • User-Controlled Private Keys: The user has full control over their private keys.
  • Higher Security: Greater security and privacy, as only the user has access to the keys.
  • Responsibility: The user is solely responsible for backing up and securing their keys.

Use Cases

  • Experienced Users: Suitable for users who have a good understanding of cryptocurrency and key management.
  • Security Prioritization: Ideal for users who prioritize security and control over convenience.

Comparison

FeatureCustodial WalletsNon-Custodial Wallets
Private Key ControlThird PartyUser
SecurityDependent on Third PartyHigh
ConvenienceHighModerate to Low
Recovery OptionsEasyUser Responsibility
Use CaseNew Users, ConvenienceExperienced Users, Security