You must have heard that some wallets are “non-custodial,” and that it seems to be very important to Bitcoiners. In this article we take a look at what it means and why it’s important.
Custodial vs Non-Custodial Wallets
When discussing the distinction between custodial and non-custodial wallets, the focus is on the custody of the essential private keys used to access your bitcoin.
In order to spend bitcoin from a wallet, you will need the associated private keys. Whoever owns the private keys, owns the bitcoin in it. Hence the famous saying: “not your keys, not your coins.”
In the case of a custodial wallet service (such as Coinbase or Binance), the private key is retained by the service provider, who assumes the responsibility of safeguarding the user’s funds. Conversely, a non-custodial wallet (also referred to as a self-custody wallet) grants users complete authority over their private key, thereby placing the sole responsibility on them to protect their investment.
Related reading : What Is A Public Key?
Different users choose different approaches to custody based on their preferences. Each approach has its own merits and drawbacks.
Exploring Custodial Wallets
As stated earlier, to grasp the functioning of a custodial wallet, it’s essential to have a foundational understanding of how bitcoin wallets operate. Contrary to popular belief, bitcoin wallets don’t physically store a user’s funds. Rather, they house private keys; keys that enable transaction setup, communication with the blockchain, and transaction authorizations.
In line with its name, a custodial wallet involves a third-party entity assuming control over users’ private keys. This third party gains complete authority over a user’s bitcoin, taking on the role of overseeing the user’s wallet keys, endorsing transactions, and ensuring the security of the user’s holdings.
Custodial wallets offer several benefits:
1. User-Friendly Interface: These wallets come with an intuitive interface that is user-friendly and doesn’t require an in-depth understanding of the technical intricacies of Bitcoin. This makes them accessible to a wider audience.
2. Ease of Management: Managing a custodial wallet is less stressful due to its familiar interface. Users can navigate their accounts without needing advanced technical knowledge. Custodial bitcoin wallets provide technical support to help users in case something goes wrong.
3. Account Recovery: If a user misplaces their password or forgets it, custodial wallets may provide options for full account recovery. This reassures users who might otherwise fear losing access to their funds.
However, custodial wallets also present certain drawbacks:
1. Limited Control: Users give up full control over their private keys and funds when opting for a custodial wallet. This lack of control puts them at the mercy of the wallet service provider.
2. Dependent Security: The security of keys and funds rests entirely on the wallet service provider. In the event of a security breach or compromise, the customers’ funds could be exposed to risks.
3. Fund Freezing: Custodial wallet providers retain the power to freeze user funds and restrict access at their discretion. This leaves users vulnerable to arbitrary decisions made by the wallet service provider.
4. KYC/AML Procedures: Users of custodial wallets might find themselves subjected to Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures imposed by the wallet provider. This can be seen as invasive and contrary to the privacy ethos of Bitcoin.
Related reading : KYC Is The Illicit Activity
In weighing the pros and cons, users must consider their priorities and comfort level with relinquishing control in exchange for convenience and ease of use.
Exploring Non-Custodial Wallets
A non-custodial wallet, also known as a self-custody wallet, places the responsibility of fund management solely on the owner. Users have complete control over their bitcoin, managing their private keys and transactions themselves.
These wallets can be browser-based, mobile apps, Windows, Linux, or Mac applications, or hardware devices, with hardware wallets often considered the most secure. A seed phrase, comprising 12 to 24 randomly generated words is provided to users, enabling key generation and acting as a backup.
The same wallet can be generated and the Bitcoin private keys stored there can be accessed with the provided seed phrase, without the need for anything else.
Having full control over their own private keys, users assume the task of transaction creation, management, and authorization themselves.
Transactions can be executed in real time or signed offline and later broadcasted to the blockchain.
Non-custodial wallets offer several benefits:
1. Full Ownership and Control: Users enjoy complete ownership and control over their bitcoin holdings, ensuring a direct and independent connection to their assets.
2. Enhanced Security: Holding private keys offline adds an extra layer of security, making it significantly more challenging for malicious actors to steal them.
3. Direct Blockchain Interaction: Non-custodial wallets enable direct engagement with the blockchain, and if used correctly, can ensure a more anonymous and decentralized experience.
4. Risk Mitigation: Individuals are not dependent on third-party services for fund management, thereby minimizing the potential for financial losses stemming from a company’s insolvency or inadequate management.
5. Adjustable Fees: Self-custody bitcoin wallets generally entail lower fees compared to custodial alternatives, since users can adjust their own fees based on current blockchain and mempool conditions.
Related reading : Why Your Bitcoin Transaction Is Stuck On Pending
However, non-custodial wallets also come with certain drawbacks:
1. Sole Responsibility: Users bear the entire burden of managing and safeguarding their private keys. Should these keys or the seed phrase be lost or stolen, the unfortunate result is permanent loss of access to funds.
2. Lack of Recovery Options: Non-custodial wallets lack recovery mechanisms if you lose your seed phrase. This absence of recourse can lead to complete and irretrievable loss of funds.
3. Complex Interface: The interface of non-custodial wallets can be intricate and less user-friendly (although not always the case), necessitating a certain level of comprehension of Bitcoin’s technical aspects.
4. Limited Customer Support: Since users retain control of their assets, customer support from non-custodial wallets tends to be limited compared to custodial counterparts. Users facing issues might need to rely on community forums or self-help resources, which might not offer immediate solutions.
In evaluating non-custodial wallets, users must consider the trade-off between increased control and security against the need for technical understanding and self-reliance.
There are many choices for non-custodial bitcoin wallets.
Non-Custodial Wallet Choices for PC and Mac
For Windows, Linux, and Mac OS, Electrum seems to be the best choice. It’s open source and provides you with full coin control over your bitcoin. However, caution should be exercised when using Electrum on computers connected to the internet, as these systems are very prone to malware attack.
Electrum can also be employed as a “Cold Wallet.” A cold wallet refers to a setup where private keys are held on a permanently offline computer. In this setup, two instances of Electrum are installed on two separate computers.
The instance that is permanently offline holds the private keys and is tasked with the sole duty of signing transactions. The other instance is installed on an online computer, holding only the public keys, and its purpose is to communicate with the blockchain, prepare transactions, and broadcast signed transactions.
Non-Custodial Wallet Choices for Android and iOS
There are many choices for android and iOS — like BlueWallet, Atomic Wallet, Trust Wallet, Coinomi, Exodus, BRD wallet, and Jaxx Liberty among many others.
Each have different characteristics and offer various features. Some are open source and bitcoin-only like BlueWallet, while others offer altcoin services as well.
The preferred choice among many Bitcoiners are hardware wallets. They combine ease of use and security, as they can be safely used even on compromised computers.
Among those are Trezor, Coldcard, BitBox, KeepKey, and Foundation Devices.
The only way to lose the funds you have on a hardware wallet is if you lose your seed phrase or it is stolen from you, or if you flash your hardware wallet with a malicious firmware.
As long as you write down your seed phrase and keep it somewhere safe, and understand that you should only enter it on the hardware wallet itself during setup and NEVER on a computer, you should be safe.
And remember, you should only download firmware updates from the original manufacturer’s website.