Custody Wallet Crypto? These are the advantages and disadvantages
Yesterday we discussed cold wallets and hot crypto wallets in the article Know Cold Wallet Crypto and Its Types and Want to Use a Hot Wallet? Understand These Things First. However, it turns out that there are two other types of wallets that you need to know about, namely custodial wallets and non-custodial wallets.
Come on, see the explanation of what a custodial wallet is!
What is a custodial wallet?
Custodial wallets work like financial institutions that act as third parties and are fully responsible for holding client assets to prevent loss or theft. However, unlike banks, custodial institutions cannot use assets entrusted to them for institutional purposes.
Well, in cryptocurrency, the custodial wallet acts as a third party that holds the private key for the user’s funds. Users only need to give permission for each transaction made. If likened, this custodial wallet is similar to a safe. Almost all exchanges use custodial wallets. Examples of popular custodial wallets are Free Wallet, Binance, BitMex, Bitgo, and Blockchain.com.
Then what is the difference between a custodial and a non-custodial wallet? The difference lies in who is responsible for maintaining the assets in it. In the custodial wallet, the third party, namely the custodial wallet, is fully responsible for maintaining the user’s assets. Whereas in non-custodial wallets, the wallet owner is fully responsible for their own assets.
Advantages of Custodial Wallet
1. By using a custodial wallet, you don’t have to worry about losing your private key or mnemonic phrase (a series of words generated by the wallet). You can easily access your wallet again if you forget or lose your private key and mnemonic phrases.
2. The custodial wallet that is the source of authority over your wallet offers several backup facilities that other wallets don’t offer. You are free to cancel transactions and repeat transactions made previously with the approval of the custody.
3. One of the most preferred benefits of a custodial wallet is no cost at all. Unlike other wallets, all transactions in the custodial wallet are supported for free. Freewallet has supported its users in saving up to $500,000 on their network fees in 2019.
Disadvantages of Custodial Wallet
1. You don’t have full control over your assets. Only third parties or custodians can fully control wallet assets. The custodian is free to determine what steps to take on a wallet transaction, including freezing the funds you have in the wallet. Of course, this is done if there are suspicious transactions or terms and conditions that are violated as a user.
2. Although the assets of custodial wallet users can be ensured to be safe because they are placed in cold wallets or hot wallets, there is still the possibility of a level of security. One big incident that happened to the custodial wallet was when Mt. Gox, a crypto exchange in Japan, suffered a loss of $450 due to the hacking of 70% of BTC transactions in 2014.
3. Custodial wallet requires a verification process through KYC (Know Your Customer) to verify all transactions. The obligation to verify the original identity is considered contrary to the principle in the cryptocurrency world, namely anonymity (unknown).
4. No offline facilities. One of the disadvantages of custodial wallets is that they cannot be accessed offline. Some users may prefer easy access without having to connect to an internet connection.
After knowing the difference between custodial and non-custodial wallets above, which one are you more interested in using? It is important to remember that in choosing the right product, it must be adjusted to the needs and types of assets you have. Continue to follow our articles so that you understand more about crypto.
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