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Wallet Wars: Custodial vs Non-Custodial

To effectively manage your bitcoin holdings, it is important to know what you own. Although it's common sense that if you have access to your cryptocurrency's wallet, you also have access to the cryptocurrency within it, there are exceptions to this rule. A custodial wallet is something you've probably used if you've ever used a bitcoin exchange, and you might not have realised what you were giving up.

Just what is a "Non-Custodial Wallet"?

When it comes to your digital money, you should have total autonomy using a non-custodial wallet. To truly be in charge of a non-custodial wallet, you need physical possession of your private keys (an alphanumeric string) or a mnemonic (12-24 word phrase). The phrase "not your keys, not your crypto" may come up in conversation, and it is for this reason that it is crucial to understand whether or not the wallet you are using is custodial. Assuming you have access to all of the keys, you can also assume you have access to all of the money in your account.

For example, Bitcoin, Ethereum, Polkadot, Kusama, and a number of ERC-20 based tokens can all be stored in non-custodial wallets on LocalCoinSwap. When you sign up for the service, you'll be asked to set a password that will be used to generate your wallets later on. The system can only verify that the password is correct; it cannot do a direct comparison. To guarantee that you, and you alone, have access to your private keys and that the wallets are really non-custodial, the platform does not keep your password. This is possible because to client-side encryption, which keeps your private keys local in your browser rather than sending them to a server. Since your password isn't maintained by LocalCoinSwap, there's one major drawback to using these non-custodial wallets: you can't change your password.

Use of Custodial Wallets and Its Disadvantages

  • When you use a managed wallet, your money is effectively in the hands of a third party.

  • Money stored in a wallet may be lost if the service provider goes out of business.

  • When the platform limits your access to your account, you have little say in the matter.

  • Funds stored in one wallet can't be accessed using a private key from another wallet.

  • If the website where your money is stored suffers a loss, you might potentially lose access to it.

  • Withdrawal times are long and can require human assistance.

Steps to Taking Your First Bitcoin Investments Outside of a Custodial Wallet

When making your first bitcoin investment, you should feel completely protected. Investing in a new type of asset, such as a cryptocurrency, that you don't know much about might make you more cautious, but that's not always a negative thing. There are certain extra steps you'll have to take if you use a non-custodial wallet, but doing so is straightforward provided you use common sense. You probably know how to properly keep your keys if you can tolerate having some cash in your ordinary wallet.

When using a non-custodial wallet, you will be given a private key, a mnemonic seed, or the means to obtain either; once you have this information, it must be safeguarded with the same care as sensitive paperwork. Without your private keys, you have no means of getting back into your non-custodial wallet and recovering your lost assets. This may sound scary, but that's because banks and other financial institutions play such a large custodial role in our lives. Cryptocurrency eliminates this necessity, and all it asks for in exchange is a bit of care on your part.

LocalCoinSwap is a great choice if you want to buy bitcoin but don't want to give over custody of your money to a third party. When a custodian handles your money, any errors they make are on you. The perils of custodial ties in the financial sector have been brought to light by events like bank runs that have occurred in various areas of the world. If you're going to invest in cryptocurrencies, you may as well take advantage of the control they provide you over your own wealth for a change.

What is the process of Non-Custodial Trading?

Some forms of crypto-to-crypto trade are increasingly moving towards non-custodial exchanges, although centralised venues to buy bitcoin remain few (places to get in and out of crypto using traditional assets such as cash). A variety of decentralised exchanges, like as Uniswap, provide relatively trustless trading, although it may be more challenging to find a venue to buy or sell cryptocurrency. LocalCoinSwap, however, enables both non-custodial trading and non-custodial wallets. Using smart contracts and bitcoin scripts (which are public and accessible for review), you may trade straight from your non-custodial wallets without ever giving the platform access to the cash. It is essential to provide a non-custodial trading environment in which money can be given to one party or the other in the case of a disagreement, but the platform cannot retain the cash for itself.

Explaining the Persistence of Custodial Wallets

There are benefits to using a custodial wallet, and this is why they are still widely used. First, using these managed wallets eliminates the need for any on-chain fees if money need to be transferred within. In addition, you won't have to worry about keeping track of the keys to your wallet if you have them stored by a third party. Exchanges that use an order book model but are not DEXs (decentralised exchanges) like Uniswap often only provide managed custodial wallets. The main drawback is the set withdrawal charge, which is frequently greater than the fee for an ordinary on-chain transaction. In order to limit the danger of losing money due to platform bugs or other difficulties, custodial wallets often charge higher fees. This is because of the sweeping transactions needed to move assets between hot and cold storage. Aside from convenience, speed is another reason why many platforms only provide managed custodial wallets. By offering a controlled wallet for consumers, many centralised exchanges encourage users to conduct a huge number of trades and balances may be dynamically altered as trades are completed.

Its always your choice

You should know that you are taking a risk while using a custodial wallet, despite the fact that they can be useful in some situations and on some platforms. Depositing funds into a custodial wallet means entrusting their care and management to a third party. Whether or not you are comfortable with this depends entirely on you. Knowing the ins and outs of trading and custodial versus non-custodial wallets is crucial.

One of the most fascinating aspects of cryptocurrencies is that it allows you to have full control of your funds at all times if you use a non-custodial wallet.

Looking for a stylish solution?

The Bitcoin Babe Trezor is a limited edition make of Trezor’s Model One cold storage wallet. Created in the infamous “Bitcoin Babe Hot Pink”, only 500 were ever made – making it the hottest cold wallet in existence!

The Trezor One is a hardware wallet providing advanced security for handling Bitcoin and other cryptocurrencies private keys.

This awesome article was inspired by gingerbreadfork on the LocalCoinSwap Academy

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