Remember the Google pop-up that asks you to save login credentials every time you log in to a new portal? Well, remembering different passwords is a headache for many. This is why they rely on password managers to make the login process more convenient. But what’s the relevance of such a technology in crypto? Just like the passwords, you need to store cryptocurrencies somewhere. There are basically two types of wallets to store cryptocurrencies: Custodial Wallets and Non-custodial Wallets. Custodial Wallets have recently been in the news due to the Celcius meltdown, which has left the future of over 1.7 million users in jeopardy. The event shows how fatal chasing promises of unrealistic APYs can be.
What Are Custodial Wallets?
As the name suggests, a custodial wallet is one where you put your crypto assets in the custody of someone else. A custodial wallet is simply a third-party application that stores your crypto and other critical information, such as your private keys. While crypto lets people “be their own banks,” custodial wallets claim to reduce the burden on investors. However, using a custodial wallet means you no longer have full control over your assets. If you have been in crypto for some years now, chances are you are already using a custodial wallet. Binance, BitMex, and Blockchain.com are some of the top free wallets.
While custodial wallets come with a lot of benefits, the declining confidence of investors amid a prolonged bear market has raised concerns about such wallets. With custodial wallets, even if you forget your password, you can access your assets. There are several disadvantages associated with the use of custodial wallets:
- Lack of Autonomy: The whole idea behind crypto is to promote financial independence. The system aims to reduce the dependency on intermediaries. Custodial wallets seem to be a hindrance on that path. It is mainly because a third party is in control of your funds and critical data. If things go south, there is little guarantee that you will get your assets back. Something that seems to be happening with Celcius users.
- The Need For KYC: The prevalent belief is that crypto transactions are anonymous. But increasing regulation has led to different exchanges and wallets incorporating the KYC process. This means the identity of users is no longer anonymous. While such practices help in curbing illicit transactions, the idea of anonymous transactions goes down the drain.
- Lack Of Offline Access: One of the biggest downsides of using custodial wallets is the lack of offline access. In order to access your wallet and your crypto assets, you need to access the custodian wallet on the internet. This means you can lose access to your funds in case of downtime or internet unavailability. What’s the use of having money when you are unable to use it in emergency situations?
- Vulnerability To Hacks and Breaches: Since the crypto industry operates over the internet, the chances of hacks and breaches are always there. Hackers store over $4 billion in crypto assets in 2021 alone. In case the custodial wallet is subjected to an attack or breach, you may end up losing your crypto assets in a jiffy. That’s another downside of relying on custodial wallets.
What’s The Alternative?
Looking at the downsides of relying on custodial wallets, one can easily figure out the roadblocks on the path toward complete decentralization. Financial independence and decentralization are at the core of the crypto ecosystem. We need to minimize the reliance on intermediaries within the crypto ecosystem. A viable solution is to adopt non-custodial wallets that emerge as an alternative.
A Non-custodial Wallet is one where you and only you are in possession of your private key. The absence of intermediaries and full control over crypto assets make non-custodial wallets the preferred choice of veterans. You can also use these wallets to interact with decentralized exchanges and decentralized applications (dApps) such as SushiSwap, PancakeSwap, etc. With non-custodial wallets, the risk of breaches or downtime is minimized or effectively eliminated. You are in control of your funds all the time and can withdraw the desired amount instantly.
However, it is important to note that using non-custodial wallets requires a certain degree of expertise. You need to have the private key handy all the time. Besides the private key, you also need to take care of an alphanumeric code for the security of your wallet. Therefore, you need to educate yourself about the working principle of a non-custodial wallet before opting for it.