Are non-custodial crypto wallets a practical option for the daily hodler?

As crypto ownership becomes more and more common, holders will need to think about how to 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 used. Private keys are cryptographic strings of code that allow owners to use the money inside 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, such as an exchange, manages after users make their first cryptocurrency purchase. In other words, the exchange is the custodian, responsible for safely storing the user’s cash and keeping track of the keys. The bulk of client money is placed in cold storage hardware wallets on major US crypto exchanges.

A custodial wallet is less secure than a non-custodial wallet. Nevertheless, many people still choose them as they are easier to use and involve less responsibility. If users forget their Exchange account password, they can probably reset it through 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 the assets being stored. Non-custodial wallet as it removes the need for a trusted third party and in some ways is more secure than custodial wallets.

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

Hiccup with wallets without custody

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

Furthermore, if users forget their password, the seed phrase acts as a backup that they can still access their assets.

Beyond this, there is little support for hardware wallet users if users lose their keys or do not take the necessary operational security measures to secure their password and keys. If a user loses, deletes or forgets their key, they risk losing access to their funds entirely.

Therefore, to adequately protect this information, non-custodial wallet users must take extra measures to ensure that their password and wallet are secure.

Related: Simple steps to keep your crypto safe

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

There are several methods that users can use to secure their seed sets. For example, Serenity Shield is a digital storage platform that enables users to recover their seed phrases in case of loss via the Strongbox feature. Seed information is on the blockchain as a non-transferable non-fungible token (NFT). This way, only the owner can access and read the information stored in Strongbox.

Aside from concerns about keeping them secure, the mechanics of sending transactions on non-custodial wallets can also be challenging for crypto newcomers.

Most non-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) on Ethereum, they need to have Ether (ETH) in their wallet to pay for gas. So users have to buy ETH and then move it to their wallet before they can transfer USDT.

However, hot wallets on exchanges enable users to pay for transactions with the same token. For example, cryptocurrency exchange Binance allows users to pay for Tether transactions using USDT instead of ETH or tokens of other networks it runs on such as BNB or Tron (TRX). Since users do not need to have the network’s native token, token transfers are simplified.

Some in the crypto space believe that non-custodial wallets are still not practical for regular users who may not be concerned with backing up their own private keys.

Hsuan Lee, CEO of Porto, the developer of the Blocto multichain wallet, told Cointelegraph that when a new user “gets their hands on a blockchain app for the first time, they couldn’t care less if they hold the keys themselves, they just want get started 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 would have to be more widespread adoption of cryptocurrency to give them a general use case for the average retail user,” adding:

“That said, I am convinced that non-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 double-check the destination addresses to avoid funds being lost. There is even an option to automatically copy an address using a button, further reducing the chances of any errors in the transfer process.

In addition, solutions such as Coinbase Wallet allow users to enter usernames when creating a new wallet. Usernames make it easy for people to send and receive crypto as they are easier to remember, leading to fewer mistakes when transferring money. The wallet also allows the user to decide whether they want the wallet to be public (other Coinbase wallet users can search by their username) or private.

When it comes to crypto transactions, lower fees usually mean longer transaction times due to lower priority from miners, while higher fees mean faster speeds and users may not know much about this. Therefore, many crypto wallets have the transaction fee preset at a medium level, allowing the user to send a transaction with average transaction time.

So sending tokens with a non-custodial wallet can be frustrating for the average non-technical user. In cases where users expect to issue 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 seeding is kept safe.