What Is a Non-Custodial Wallet?

One of the first conundrums faced by crypto beginners is the , a place where all digital assets are “stored.” Technically speaking, unlike cash sitting in a physical wallet, crypto assets don’t actually reside inside a digital asset wallet. Understanding crypto wallets is thus a prerequisite for anyone wanting to participate in the fast-growing decentralized crypto-based financial system. 

At some point, they’ll have to choose between a custodial or now-custodial wallet. In this guide, we explain what a non-custodial wallet is and the pros and cons of using it.

How does a cryptocurrency wallet work?

Crypto assets are just data on the blockchain. A crypto wallet is a tool that allows crypto owners to access their assets on the blockchain. Either way, anyone looking to send digital assets across blockchain networks will need to deal with things like wallet addresses/keys.

Every crypto wallet has two main components:

• Public key: If you want to send someone crypto, you will need to know their public key and vice versa.
• Private key: This, as the name suggests, should be kept secret/private by the wallet owner. A wallet owner needs to sign off on any transaction moving digital assets out of a wallet using the private keys.

Wallet keys can be stored on the internet or computer via wallet software. Keys can also be printed out/written on paper, or stored in a hardware device. As a result, cryptocurrency wallets can take on different forms.

What is a custodial wallet?

Before diving into the discussion of the different physical/software forms that a digital wallet can take, it’s important to understand the difference between custodial and non-custodial wallets.

The former is essentially where a crypto investor trusts a third party with the management/protection of their wallet keys. This third-party takes on the role of “custodian,” tasking them with the preservation of crypto owners’ property.

Cryptocurrency exchange accounts comprise the majority of custodial wallets. For example, say a new cryptocurrency investor sets up an account with a major crypto exchange like BINANCE or Coinbase. Imagine they then purchase cryptocurrency but decide to leave it in their exchange account.

Their crypto is actually held in a custodial wallet by Binance/Coinbase, who now assume responsibility for the management of the wallet keys.

Growth in the popularity of custodial wallets is also rising amid increased investor interest in crypto investment products. Crypto/digital asset Exchange Traded Funds (ETFs) and Exchange Traded Products (ETPs) continue to secure approval across the world.

Issuers of the ETFs/ETPs act as a custodian for investor funds, including in the case of crypto. That means they assume responsibility for the management of the keys for the wallet within which investors’ crypto is being held.

Pros of custodial wallets

For investors with a limited understanding of crypto technology, allowing a third party to manage their holdings can be an attractive proposition. Beginners all too often make the mistake of misplacing their wallet keys and losing access to their holdings.

Crypto beginners may prefer to leave the responsibility of wallet key management to professionals with a better understanding of blockchain technology. For example, large cryptocurrency exchanges store user funds in a complex mix of hardware and software wallets. It may be difficult for many casual crypto investors to replicate this level of security sophistication.

Cons of custodial wallets

Custodial wallets are not without their risks. Crypto holders face the risk of losing their property should the security or solvency of the custodian be compromised.

Those who keep up with the crypto news will remember the abrupt collapse of the cryptocurrency lending service Celsius Network. The platform, which had previously managed tens of billions of dollars worth of investor funds, suddenly halted depositor withdrawals in June. 

A string of other struggling crypto lending platforms swiftly followed suit, leaving crypto investors out of pocket to the tune of billions.

Elsewhere, some cryptocurrency purists point out that custodial wallets result in centralization that goes against the crypto ethos of decentralization. Holders of custodial wallet-stored crypto could potentially run afoul of the custodian, or of the government agencies regulating the custodian.

This leaves their crypto at risk of seizure. Meanwhile, crypto custodians are normally subject to Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations. Many crypto purists see this as a breach of crypto user privacy.

Meanwhile, some custodial providers will charge fees that can eat into profits.

What are non-custodial wallets?

Now we understand what a custodial wallet is, and its main pros and cons, what about non-custodial wallets? These are a type of crypto wallet where the crypto owner takes direct responsibility for the management of their keys.

That means if the owner somehow loses/misplaces the keys, then the cryptocurrency in the wallet could be lost forever. As noted earlier, these can come in the form of web browser-based software, ordinary downloadable software, hardware, or in the form of paper. Hardware wallets are widely viewed as the most secure way to store crypto wallet keys.

Pros of non-custodial wallets

As crypto purists who seek to completely shrug off the yoke of centralized government/financial institutions argue, non-custodial wallets hand investors complete control over their assets. When stored in a non-custodial wallet, no single centralized entity can confiscate or freeze a digital asset.

With non-custodial wallets, there is no barrier to participation in the global crypto ecosystem. Anyone with an internet connection anywhere in the world can set up a wallet without facing KYC restraints.

Another benefit of non-custodial wallets is that it is easier to engage in digital asset transfers, as they interact directly with the blockchain. This means that non-custodial wallets, unlike its custodial counterparts, in many cases, have direct access to the growing Decentralized Finance () ecosystem.

Cons of non-custodial wallets

Assuming the responsibility of managing one’s own keys is a big one for any cryptocurrency investor, especially if they are managing holdings with significant value. As noted, those who lack experience in crypto technology run the risk of losing access to their funds if careless.

That compares to forgetting the password to an exchange account, an issue that can normally be quickly resolved with customer support. Novices operating non-custodial wallets are also likely more vulnerable to phishing, crypto hacks, and than their more experienced counterparts running custodial wallets.

Crypto investors taking custody of their own assets should always adhere to security best practices, such as using strong passwords and two-factor authentication where possible.

Many non-custodial wallets are renowned as user/beginner friendly. But moving crypto from an exchange to a non-custodial wallet nonetheless still presents a new hurdle for beginners. For many, it might be easier and safer to just leave their crypto on the exchange.

Custodial vs. non-custodial wallets

If a wallet is non-custodial, it will give you and only you the private keys associated with the public address. If this isn’t the case, others also have access to the private keys, meaning it isn’t a non-custodial wallet.

Which is better?

This depends entirely on the needs and preferences of the user. Beginners just looking to buy some crypto and HODL may wish to leave their crypto on the exchange. Larger-scale multi-asset investors who lack specific expertise in crypto technology may choose to purchase crypto via ETF and ETPs.

More sophisticated cryptocurrency investors may wish to use a combination. They may maintain some crypto in a custodian exchange wallet for fast trading. Some might also want to keep some crypto in software-based custodial wallets for moving funds in and out of various platforms.

Additionally, might also want to leave a significant portion of their crypto in hardware wallets, or “cold storage,” for maximum security.

How to create a non-custodial wallet

First, you will need to download the METAMASK chrome extension from the application’s website.

Once you have done that, it will appear as a chrome extension in the upper right. Click on the extension to begin setting up the wallet.

Those who already have a MetaMask wallet on another device will be able to access it via their Secret Recovery Phrase, which is essentially their private key. Otherwise, click on “Create a Wallet.”

MetaMask will prompt you to create a new password. Make sure it is strong. Once you have done that, you will see a page where MetaMask explains how the Secret Recovery Phrase works and why it is important to keep private.

Essentially, the phrase allows you to access the wallet from other devices. If compromised, a thief could steal all of the crypto you are holding in the MetaMask wallet. It is important to record the Secret Recovery Phrase in a secure way. That’s because, if lost, you may lose access to the funds in the wallet and MetaMask won’t be able to help you.

On the next page, MetaMask will reveal this Secret Recovery Phrase. Write it down. MetaMask then asks for you to repeat back the Secret Recovery Phrase on the next page.

Once done, the wallet is ready. You are now ready to buy, send and swap cryptocurrencies on various blockchains.

Top 5 web-based non-custodial wallets

You have several non-custodial wallets at your disposal. Here, we list five of the most popular non-custodial wallets.

MetaMask

Since its launch back in 2016, MetaMask has become one of the most popular non-custodial cryptocurrency wallets. Much of this boom occurred during the “DeFi summer” of 2020. At the time, MetaMask was one of the few wallets with access to multiple smart-contract blockchains.

Wallet critics view MetaMask as one of the most user-friendly options on the market. It functions as a browser extension that pops up when needed as crypto users navigate various Decentralized Applications (DApps). MetaMask wallet users can buy and sell cryptocurrency directly on the application via a trading function.

One of the big drawbacks of the MetaMask wallet is that it can only interact with Ethereum or Ethereum Virtual Machine (EVM) compatible networks. That means its users are unable to interact with the networks, for example. But the wallet does support Non-Fungible Tokens (NFTs) and has special integration with OpenSea, the world’s largest NFT marketplace

MyEtherWallet

MyEtherWallet, or MEW, is another wallet that has been around for a long time, having first launched in 2016. Like MetaMask, MEW focuses predominantly on the Ethereum network.

The wallet can interact with a range of Ethereum/EVM-based DApps and also supports NFTs. Unlike MetaMask, however, it does support Bitcoin, but offers little compatibility with other non-ethereum/EVM altcoin networks.

Critics generally regard the wallet as very user-friendly. However, MEW users have frequently been targeted in phishing attacks.

Coinbase Wallet

Coinbase launched its own non-custodial wallet back in 2018, and it has become a popular choice among crypto investors owing to its familiar, simple user experience. It has greater compatibility with a larger range of blockchain networks than the above-mentioned wallets.

Users can store bitcoin, ethereum, solana, and a host of other coins and tokens. It functions as a browser extension much like MetaMask and interacts with DApps in the same way. The wallet’s fees are amongst the most competitive on the market.

Coinbase’s wallet is completely separate from its parent company. That means, unlike when setting up an exchange account, there are no KYC requirements. The wallet can be connected to a Coinbase exchange account to facilitate the easy transfer of crypto, but this is optional.

Unlike MetaMask and MyEtherWallet, the code behind Coinbase’s Wallet is not open source. Whilst this might not be an issue for many crypto investors, decentralization purists tend to distrust code that isn’t open to public scrutiny.

Trust Wallet

Binance-backed Trust Wallet is another popular non-custodial wallet provider. Trust Wallet is compatible with a range of blockchains and is compatible with a range of DApps in the Ethereum and EVM-compatible ecosystems. The wallet is also compatible with NFTs and digital art collectibles. Users can stake proof-of-stake cryptocurrencies directly within the app.

The wallet has an in-house exchange feature, where users can view prices and charts without having to leave the platform. The wallet features additional security layers including optional biometric and PIN code scanning. Like MetaMask and MyEtherWallet, Trust Wallet’s code is open-source code. Furthermore, much like the other wallets on this list, critics regard the wallet as highly user-friendly.

Crypto.com DeFi Wallet

Crypto.com DeFi Wallet offers Crypto.com platform users a seamless way to move their assets into a non-custodial wallet and access a range of features. As implied by the name, the wallet offers users easy access to a range of DeFi applications and products, allowing users to easily generate yield on their assets.

The wallet allows users to store digital assets across a range of blockchains and ecosystems, including support for NFTs, and has a swap feature that allows the easy buying and selling of tokens. Like many of the other wallets on this list, the Crypto.com wallet also functions as a browser extension, improving usability as users browse DeFi platforms.

What about hardware wallets?

The above five wallets are all examples of “hot wallets” that are internet-based. With these wallets, your keys will be stored on an internet server. Whilst this provides the most convenience and ease of use, it also leaves your private keys more vulnerable to discovery by hackers.

A slightly more secure way to store your wallet keys is on your computer hard drive via wallet software. This leaves your keys a little less vulnerable to internet hackers, but still does not mean they are entirely safe, as computers remain vulnerable to being infected by key-hunting malware that could still compromise a software wallet.

The most secure option is the hardware wallet. These wallets store your private keys on a hard drive that is separate from the computer and are sometimes referred to as “cold wallets.” Normally hardware wallets only connect to the internet to broadcast to a cryptocurrency network that a transaction has been signed with the private keys, a process which is done inside the device.

This means that the information about the private keys never leaves the hardware wallet. In most cases, the only way to get the private keys out of a hard wallet is if it was physically stolen and broken into by a thief.

One of the main drawbacks of hardware wallets is that they are less convenient. They normally need to be plugged in, powered up, and connected to the internet. The process of validating a crypto transaction is much clunkier compared to software wallets. Meanwhile, they normally cost anywhere between $50 and $200.

For smaller-time crypto investors wanting to take custody of their crypto, hot wallets might be ok. For larger holders, using a mixture of hot wallets for easy trading and hardware wallets for security might be better.

Top 3 hardware wallets

There are three major hardware wallet manufacturers. We describe each of them below.

Ledger Nano S

The Ledger is viewed by many as the best hardware wallet provider for those looking to store and trade large quantities of cryptocurrency, given its strong reputation for security. The company released its first hardware wallet back in 2016.

Ledger’s Nano S wallet is one of the most popular on the market and is considered to be highly user/beginner friendly. The wallet supports over 1100 cryptocurrencies. However, a lack of storage means it can only store the keys of 3–5 wallets at once. For those seeking to store multiple cryptocurrencies in one hardware wallet, this might not be the best option.

Trezor Model One

Trezor’s Model One launched back in 2014, is another popular hardware wallet. Like Ledger’s Nano S, the Model One has a reputation as being very beginner friendly.

Model One owners will be able to purchase crypto directly into the wallet using Trezor’s Wallet app using fiat currencies. This feature lowers the barrier for beginners even more by allowing them to bypass having to set up an account on a cryptocurrency exchange.

One common criticism of the hardware wallet is that, despite costing around $80, it has a cheap feeling build quality. That compares to Ledger’s Nano S which has a much sleeker feel.

SafePal S1

SafePal launched its S1 model in January 2019, so it is a relatively new kid on the block. The wallet supports 20 blockchains and over 10,000 tokens, including NFTs. Many regard SafePal’s S1 as one of the most user/beginner friendly on the market. At around $40, it is also one of the more cost-effective

Some crypto enthusiasts like the wallet’s self-destruct feature. This feature is designed to prevent malware attacks. SafePal is backed by Binance exchange’s venture capital arm Binance Labs.

Non-custodial wallets suit long-term hodling

The decision of what kind of cryptocurrency wallet to go with is a complicated one for any cryptocurrency investor. Ultimately, each individual will need to weigh up their preferences regarding having more or less control over their crypto, and their preferences for security versus convenience. Each cryptocurrency wallet type has its pros and cons.

Frequently asked questions