Definition of a cryptocurrency wallet
A cryptocurrency wallet is a tool for interacting with cryptocurrencies on the blockchain. With it, you can create and manage addresses for storing and transferring digital assets. This is an application with an interface and various functions for managing the address and the crypto assets.
Custodial cryptocurrency wallets
A custodial wallet is an application for storing and transferring cryptocurrencies, the peculiarity of which is that its operator (custodian) manages users' addresses or has access to their private keys. In addition, custodian customers are required to complete the identity verification (KYC) process.
A built-in custodial wallet is available for centralized crypto exchanges. Although each client has a separate account and balance, all funds are held in a small number of addresses managed by the exchange. This simplifies the work with trading instruments and allows you not to pay for transactions within the platform.
Individual clients rarely encounter custodial wallets outside of dedicated applications. However, institutional investors often use such solutions - companies that operate with large amounts. They transfer cryptocurrencies to the custody of a professional company with increased security and other services, such as insurance.
Disadvantages of custodial wallets
The main disadvantage of custodial crypto wallets is the ability of the custodian to gain access to clients' crypto assets.
The exchange administration owns private and public keys from the addresses where clients' cryptocurrencies are stored. Centralized storage of many funds makes trading platforms a frequent target for hacker attacks. As a result of hacks, individual users can lose their cryptocurrencies.
In addition, a crypto exchange is a legal organization that is obliged to obey the law and the requirements of law enforcement agencies. It can provide customer data and freeze their funds in the wallet at their request, for example, in the case of sanctions or seizure of property by a court decision.
An unpleasant moment can also be the lack of access to their assets during technical work since the custodian can, if necessary, disable access for users.
Non-custodial crypto wallets
A non-custodial cryptocurrency wallet retains the creator of the address in complete control of their funds since it does not transfer their private keys to anyone. Such an application cannot freeze or manage user funds, but it is not responsible for their safety.
This is usually an application that can be downloaded to a PC, mobile device, or browser. Creating an address on the blockchain through a non-custodial application does not require KYC.
Popular non-custodial wallets are further secured by publishing their source code. This allows independent experts to verify that these cryptocurrency storage applications are safe. Also, such projects are often supported by a whole community of programmers.