Any crypto assets are a set of data on the blockchain. Accordingly, a crypto wallet is a tool that allows cryptocurrency owners to access their assets.
There are two main components in every crypto wallet:
- Public Key: It is used in cases when the user wants to send cryptocurrency to someone. It works the same way vice versa.
- Private key: As the name suggests, the owner of the wallet must keep it secret. If a transaction moves digital assets out of a wallet using private keys, the wallet owner needs to sign it.
The keys to a cryptocurrency wallet should be safely kept. In case of need they can be printed, or you can write them down on paper. Also you can keep them online the way you like.
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What is a non-custodial wallet
A non-custodial crypto wallet is a crypto wallet, the owner of which takes responsibility for key management. If the keys are lost, the cryptocurrency in the wallet will become inaccessible.
To understand the main difference of non-custodial wallet from a custodial wallet, it’s possible to have a look at the same analogue at a bank account. There are cases when bank account may be blocked or restricted. But only you have access to the safe, and no one can open it without your participation.
Non-custodial wallets can be in the form of software (software), a browser-based solution, regular downloadable software, or hardware solutions. Hardware wallets are considered the most secure.
Pros of non-custodial wallets
Non-custodial wallets give investors complete control over assets. No centralized organization will be able to confiscate or freeze them.
To create such a wallet, you do not have to go through KYC and provide your documents – just an Internet connection is enough.
In addition, non-custodial wallets make it easier to transfer digital assets. They interact directly with the blockchain, which means they have access to the growing system of decentralized finance (DeFi).
Cons of non-custodial wallets
Taking charge of keeping the keys to your wallet is a big responsibility for any crypto investor. A forgotten password from an account on the exchange can be restored by resetting or contacting support. But the loss of keys from a non-custodial wallet means that you can say goodbye to the assets stored there.
Non-custodial wallets can also be too difficult for beginners to use. The transfer of cryptocurrency from the exchange to the wallet in this case turns into a real quest. For this reason, many users leave their assets stored on the exchange.
For beginners who just want to buy cryptocurrency and store it for a while, a custodial wallet will do.
More experienced users often use a combination of different wallets. For example, they keep part of their assets on the exchange for trading, and part of them in software non-custodial wallets to move funds to and from DeFi platforms.
Some investors choose to keep most of their assets in hardware wallets for maximum security.
Hardware wallets store private keys on their hard drive. They only connect to the internet to communicate to the blockchain that the transaction was signed with private keys.
This makes hardware wallets the most reliable tool for storing cryptocurrencies. The only way to get private keys from such a wallet is to physically steal and hack it.
One of the main disadvantages of hardware wallets is the inconvenience of use. And the transaction confirmation process itself is much more complicated compared to browser wallets.