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Custodialism - What Wallet?

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Avatar for RowanSkie
Written by   185
10 months ago

Everyone always hears about how custodial wallets don't give you true privacy, and how wallets that use Lightning Network are always custodial. Everyone also knows how the early Bitcoin wallets purely let you have your own private keys, which meant they are non-custodial.

What everyone these days know is why they should care about their private keys and who gets to hold them. This article is my thought piece on why you should have non-custodial wallets.


What Do You Have In Custody?

There's a lot of things in the cryptocurrency space that you'll mostly hear for the first time, and one of which is the mention of the word custody (custodial and non-custodial wallets).

Before we begin, let's first discuss what the word custody means in itself.

It's the word used to signify control and possession of something.

Outside cryptocurrency space, this word is more used on legal things, like who gets the custody of the child during a divorce or who really owns the company.

With this definition in mind, let's move towards the two main usages of the word in the crypto space.


Custodial Wallets

As mentioned above, having custody means having control and possession of a thing. Custodial wallets, on the other hand, have the custody of the user on the wallet developer's hands.

On paper, it seems like a tradable compromise, especially if you need to get money from an exchange. However, you are trusting whoever created that wallet that your funds are yours, and this is against the idea of cryptocurrencies in the first place.

How does one know if their wallet is custodial?

There are many ways to know if a wallet is custodial, and it's just as simple as checking if you can export a private key.

All cryptocurrency addresses aren't truly addresses but instead a pair of public-private keys. This meant that whoever holds the private key of a public key can control the public key.

These two are basic cryptography aspects that are used to transact, obtain ownership, and clarify if you really own something, therefore when you can't find the private key of your wallet, it's a custodial wallet.

Examples of potential custodial wallets are the following:

  • Exchange wallets

  • Lightning Network wallets

  • Multi-coin wallets


Non-Custodial Wallets

On the other side of the spectrum are non-custodial wallets. These wallets are built that they only read your private keys and the developers have no control over what you do with these keys.

This is actually the most preferred form in many spaces, cryptocurrency or other crypto space otherwise.

The naming scheme, however, may confuse people. All you need to know is that with a non-custodial wallet, you own all the coins on those wallets.

How does one know if their wallet is non-custodial?

If a wallet is non-custodial, it means you can use the private keys given from that wallet to another wallet and it still works. It could be cross-wallets, or between the same wallet. If you can control the private keys, you can control your money.

Here are some examples of potential non-custodial wallets:

  • Single-coin wallets

  • Open source wallets


The Dangers of Custodialism

There's a problem with using non-custodial wallets, and that's actually intentional and that is that these wallets don't let everyone, including the government, see what you're doing unlike a bank account or a custodial wallet. These wallets are under heavy scrutiny and are a focus of a few anti-cryptocurrency wallet laws.

Another main problem with custodial wallets, however, is the reliance on KYC or "Know Your Customer" and the ever-growing potential of shutdowns or money being seized due to the "malicious practice" of the user.

A regular user must know if they want to keep their coins to themselves or be able to properly use them for spending or use it for exchanges. By knowing your main usage of cryptocurrency, you know how to select the correct one.

In my opinion, however, a non-custodial wallet works best. There's a reason why there's decentralized finance now.

This is Rowan, signing off.

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Written by   185
10 months ago
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Comments

A non custodial wallet is perfect, a good one as that is Atomic Wallet. Knowing what it means of being non custodial and decentralized wallet, Atomic Wallet will be everyone's wallet. For more info about Atomic - https://atomicwallet.io

$ 0.00
3 months ago

Clearly, not your keys not your crypto

$ 0.00
10 months ago

This article is clearly not meant to be misleading, but FYI:

While most lightning network wallets are custodial, it is possible to hold private keys for BTC on the lightning network. Key word here is possible, I haven't tried myself because it seems entirely too complicated, expensive, and risky with no real benefit. That having been said, as far as I can tell, anyone showing or demonstrating that using the lightning network is easy likely uses a custodial solution.

Hardware wallets are likely to be non-custodial. They are also likely to be multi-coin. I wouldn't be surprised if there are other open-source multi-coin wallets that are non-custodial. I also wouldn't be surprised to see an open source custodial wallet.

You don't really "control" a public key, it is only a pointer/identifier that can be used to verify signatures from a private key. The signatures from a private key allows you to transact with funds stored in a transaction identified by a public key or prove that you have ownership of that public key (as is necessary to transact, but also by signing a message).

$ 0.00
10 months ago

I should really clean up my research. Thanks for telling me about these. I swear I already had it on my brain but hey, trying to simplify things.

$ 0.00
10 months ago

Chosen right wallet to save your amount wallet matter but tody lots of wallet and scam so danger ⚡

$ 0.00
10 months ago