Are noncustodial crypto wallets a practical option for the everyday hodler?


As crypto ownership becomes more and more common, owners 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 cryptocurrency. Each wallet has a private key that allows the wallet to be spent. Private keys are cryptographic strings of code that allow owners to spend the funds within a wallet, as well as prove ownership. Wallet information is also stored offline, reducing the risk of a hacking attempt. Everyday non-technical crypto users can benefit from the increased security, but it may come at the expense of convenience, depending on their needs.

What is a custodial wallet?

An escrow wallet is a type of online cryptocurrency wallet that a third party manages, such as an exchange, after users make their first cryptocurrency purchase. In other words, the exchange is the custodian, responsible for keeping the user’s cash safe and keeping track of the keys. Most of the customer money is housed in cold storage hardware wallets at major US crypto exchanges.

A custodial wallet is less secure than a non-custodial wallet. However, many people still choose them because they are easier to use and involve less responsibility. If users forget their exchange account password, they can probably reset it using established identity verification processes.

What is a non-custodial wallet?

With a non-custodial cryptocurrency wallet, users are the sole custodians of their private keys and, therefore, of the assets stored. A non-custodial wallet because it removes the need for a trusted third party and, in some respects, is more secure than custodial wallets.

There are many different types of non-custodial wallets, including browser wallets, software wallets for mobile phones and computers, and hardware wallets. Hardware wallets, which come in a variety of formats, are said to provide the highest level of security for storing crypto. These digital wallets look like USB drives but have a screen and physical buttons instead.

Hiccups with unguarded wallets

Non-custodial wallets are simple to set up. For software non-custodial wallets, owners must download the wallet, back up the recovery seed phrase, or a key consisting of a 12-, 18-, or 24-word string of random words, and set a password.

In addition, if users forget their password, the passphrase acts as a backup through which they can still access their assets.

Beyond this, 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 completely.

Therefore, to adequately protect this information, unguarded wallet users must take extra measures to ensure that the password and wallet are secure.

Related: Simple steps to keep your crypto safe

When securing seed phrases, the usual advice is for users to write them down on paper and keep them in a safe place. However, it is generally not recommended that users keep seed 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 seed phrases safe is to keep them offline.

There are additional methods that users can take to secure their seed phrases. For example, Serenity Shield is a digital storage platform that allows users to recover their seed phrases in case of loss through its Strongbox feature. Seed information is on the blockchain as a non-transferable non-fungible token (NFT). Thus, only the owner can access and read the information stored inside the Fort.

Aside from concerns about keeping them safe, the mechanics of sending transactions on unguarded wallets can also be difficult for crypto newbies.

Most custodial wallets require users to pay for transactions using the native cryptocurrency of the network on which the token is built. For example, if a user wants to transfer Tether (USDT) to Ethereum, they must have Ether (ETH) in their wallet to pay for gas. So, users will have to buy ETH, then move it to their wallet before they can transfer the USDT.

However, hot wallets on exchanges allow users to pay for transactions using the same token. For example, cryptocurrency exchange Binance allows users to pay for Tether transactions using USDT instead of ETH or the tokens of other networks it operates on such as 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 custodial wallets are not yet practical for everyday users who may not care about backing up their own private keys.

Hsuan Lee, CEO of Portto, the developer of Blocto’s multi-chain wallet, told Cointelegraph that when a new user “gets their hands on a blockchain app for the first time, they don’t care less if they hold the keys themselves, they just want .start quickly.”

Rodolphe Seynat, co-founder of Serenity Shield – a digital storage and privacy platform – told Cointelegraph, “Non-custodial wallets have a long way to go before they can be considered viable options for everyday use. There should be adoption of cryptocurrency more widely to give they general use case for the average retail user,” adding:

“That said, I strongly believe that custodial wallets remain a safer, more secure and more private way for users to manage assets and position themselves well for the future.”

User friendly?

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 duplicate the destination addresses to avoid the funds being lost. There is even an option to automatically copy an address with a button, to further reduce the chances of errors in the transfer process.

In addition, solutions like Coinbase Wallet allow users to set usernames when creating a new wallet. Usernames make it easier for people to send and receive crypto because they are easier to remember, leading to fewer mistakes when transferring funds. The wallet also lets the user decide if they want their wallet to be public (other Coinbase wallets can look up 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 widely know this. Therefore, many crypto wallets have the transaction fee preset at an average level, allowing the user to send a transaction with the average transaction times.

So, 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 preservation, non-custodial wallets are the best choice, as long as the seed phrase is kept safe.