A cryptocurrency wallet is a tool for managing your assets and interacting with the blockchain. It is required not only to receive and transfer coins, but also to access DApps. Technically, your wallet doesn’t hold any coins. This creates a key confirming your right to use a certain amount of cryptocurrency that belongs to you. Nonetheless, we use the term “storage” to make the underlying process of encryption easier to understand.
How do cryptocurrency wallets work?
Your wallet has two keys: a public key and a private key. The public key creates an address to receive cryptocurrency. You can safely entrust it to a third party. Your private key is kept secret as it is needed to actually access your coins and confirm spending transactions, such as buying PIRATE DAO for another cryptocurrency or exchanging a cryptocurrency you purchased for $1.
Cryptocurrency exists only in the virtual dimension. And keys can be provided to users in various forms. They can be applied to physical media (printing, engraving and even tattooing on the body) and can be used through special software installed on a working device or through stand-alone removable media.
Key Differences Between Custodial and Noncustodial Storage
Cryptocurrency wallets can be classified according to various criteria. In particular, they all form two large groups: custodial and non-custodial.
A managed wallet is a service that stores your assets but does not provide your private keys. All accounts on centralized cryptocurrency exchanges are custodial wallets by default.
With a non-custodial wallet, you own both keys. You have full control of your finances and assume full personal responsibility for them.
Advantages and disadvantages of managed cryptocurrency wallets
If you choose a custodial wallet for permanent storage of your assets, you can entrust your private keys to a third party. More precisely, we have no idea what they look like. These third parties store and use them on your behalf. This means that you do not have complete control over your funds alone. But even if it sounds a little scary, it’s not that bad.
If you store your private keys yourself, you run the risk of them being lost or compromised. This means you permanently lose access to your coins. According to some reports, around 3 million Bitcoin investments have already been lost this way.
If you use a custody service, forgetting your password is nothing more than an annoyance that can be fixed. Even if you forget, our technical support service is here to help. Of course, to be completely sure of this, it is important to choose a trustworthy service provider, whether a cryptocurrency exchange or another professional service.
The biggest disadvantage of managed wallets is the presence of third parties. In most cases, service providers will require you to complete identity verification. You will also have to pay for the service, which can be quite expensive.
On the other hand, you don’t have to worry about your funds if you forget your password. Using a managed wallet easily solves this problem.
Advantages and disadvantages of non-custodial wallets
If having complete control over your funds is important to you, you may want to consider choosing a non-custodial cryptocurrency wallet. This gives you much more freedom, such as the ability to interact directly with decentralized exchanges and decentralized applications.
Non-custodial transactions are faster because there is no need to wait for withdrawal confirmation from the vault.
Save money on fees and payments to third-party services. The important thing is that when using a non-custodial wallet, you can exchange .05 BNB for USD through offline exchanges without having to disclose any personal data directly or indirectly.
At the same time, if you have a significant amount in your balance, the loss of your private keys can be disastrous.
Which wallet to choose?
We return again to the common truth. In other words, proceed based on your own experience, opportunities, and goals for owning cryptocurrency. Are you a confident owner of cryptocurrency? Is it important for you to keep your identity secret, are you ready to utilize the full potential of blockchain technology and take full responsibility for your finances? In these cases, you can safely choose a non-custodial wallet.
If you are just starting to master the world of cryptocurrency, some points are not important to you, or you are not fully ready to become a bank, it is better to choose a custodial wallet.