As crypto ownership becomes more commonplace, holders will need to think about how they protect and hold their assets. The safest option is to store cryptocurrency in a personal wallet.
Crypto wallets are programs that allow users to store, send, and receive cryptocurrencies. Each wallet has a private key that allows the wallet to be spent. Private keys are strings of cryptographic code that allow owners to spend funds in a wallet, as well as prove ownership. Wallet information is also stored offline, reducing the risk of hacking attempts. Daily non-technical crypto users may benefit from increased security, but this may come at the expense of convenience, depending on their needs.
What is a custody wallet?
A custodial wallet is a kind of online cryptocurrency wallet that a third party manages, like an exchange, after users make their first cryptocurrency purchase. In other words, the exchange is the custodian, responsible for keeping the user’s money safe and keeping track of the keys. The bulk of client money is housed in cold storage hardware wallets at major crypto exchanges in the United States.
A custodial wallet is less secure than a non-custodial wallet. Yet many people still choose them because they are easier to use and involve less responsibility. If users forget their password for their exchange account, they can likely reset it through established identity verification processes.
What is a non-custodial wallet?
With a noncustodial cryptocurrency wallet, users are the sole custodians of their private keys and, therefore, stored assets. Non-custodial wallet because it removes the need for a trusted third party and in some ways is more secure than custodial wallets.
There are many types of non-custodial wallets, including browser-based, software wallets for mobile phones and computers, and hardware wallets. Hardware wallets, which come in different formats, are supposed to offer the highest level of security for storing crypto. These digital currency wallets look like thumb drives but have a screen and physical buttons instead.
Hiccups with non-custodial wallets
Non-custodial wallets are simple to set up. For non-custodial software wallets, holders must download the wallet, save the recovery seed phrase or a key that includes a random word string of 12, 18, or 24 words, and set a password.
Additionally, if users forget their password, the seed phrase serves as a backup through which they can still access their assets.
Beyond that, there is little support for hardware wallet users if users lose their keys or fail to take the necessary operational security measures to secure the password and keys. If a user loses, deletes or forgets their key, they risk losing access to their funds entirely.
Therefore, in order to adequately protect this information, users of noncustodial wallets are required to take additional steps to ensure password and wallet security.
When securing key phrases, the usual advice is for users to write them down on a piece of paper and keep them in a safe place. However, users are generally not recommended to keep key phrases stored in text files on their personal computers or mobile devices. For example, personal computers and Android devices are susceptible to viruses, while notes stored on iPhones can be compromised if a user’s iCloud account is hacked. So instead, the best practice for keeping keyphrases safe is to keep them offline.
There are additional methods users can use to secure their seed phrases. For example, Serenity Shield is a digital storage platform that allows users to recover their seed phrases if lost through its Strongbox feature. Seed information is on the blockchain as non-transferable data non-fungible token (NFT). This way, only the owner can access and read the information stored in the vault.
Aside from concerns about their security, the mechanisms for sending transactions to non-custodial wallets can also be difficult for newcomers to crypto.
Most non-custodial wallets require users to pay for transactions using the native cryptocurrency of the network the token is built on. For example, if a user wants to forward Tether (USDT) on Ethereum, they must have Ether (ETH) in their wallet to pay for gas. Thus, users will need to buy ETH and then transfer it to their wallet before they can transfer USDT.
However, hot wallets on exchanges allow users to pay for transactions using the same token. For example, the Binance cryptocurrency exchange allows users to pay for Tether transactions using USDT instead of ETH or the tokens of other networks it operates on like BNB or Tron(TRX). Since users do not need to hold the network’s native token, token transfers are simplified.
Some in the crypto space believe that noncustodial wallets are still impractical for everyday users who may not care about backing up their own private keys.
Hsuan Lee, CEO of Portto, the developer of multi-chain Blocto wallet, told Cointelegraph that when a new user “gets their hands on a blockchain application for the first time, they don’t care if they own the blockchain themselves. keys, he just wants to get started quickly.”
Rodolphe Seynat, co-founder of Serenity Shield – a digital storage and privacy platform – told Cointelegraph: “Noncustodial wallets have a long way to go before they can be considered viable options for everyday use. There should be wider adoption of cryptocurrency to give them a general use case for the average retail user,” adding:
“That said, I strongly believe that non-custodial wallets remain a safer, more secure and more private way for users to manage their assets and position themselves well for the future.”
Wallet providers have worked to make them more user-friendly over time. For example, both custodial and non-custodial wallets tend to remind users to double-check destination addresses to prevent funds from being lost. There’s even an option to automatically copy an address at the push of a button, to further reduce the chance of errors in the transfer process.
Additionally, solutions like Coinbase Wallet allow users to set usernames when creating a new wallet. Usernames make it easy for users to send and receive crypto because they are easier to remember, which reduces the number of errors when transferring funds. The wallet also allows the user to decide whether they want their wallet to be public (other Coinbase wallet users can search for their username) or private.
When it comes to crypto transactions, lower fees usually mean longer transaction times due to lower priority of miners, while higher fees mean faster speeds and users may not know that widely. Therefore, many crypto wallets have the predefined transaction fees at an average levelallowing the user to send a transaction with the average transaction times.
Thus, sending tokens with a non-custodial wallet can be frustrating for the average non-technical user. In cases where users expect to send tokens regularly, they may find a custodial wallet more convenient. On the other hand, when it comes to long-term storage and custody, non-custodial wallets are the best choice, as long as the seed phrase is kept safe.