Why the use of custodial wallets contradicts the idea of Bitcoin

20 178
Avatar for Telesfor
2 years ago
Topics: Bitcoin, BTC, Wallet, Bank

To understand the answer to this question, you first need to know what the difference is between a custodial and non-custodial wallet.

A non-custodial wallet is a wallet that stores funds to which the owner and only the owner has access. Access to these funds is gained using seed or private keys. I have described how such a wallet works here. If you know the seed or your private key, you are independent. If one wallet doesn't work, you can import it into another wallet. You are the master of your funds. Nobody can freeze them, nobody can lock them, nobody can steal them. They are stored in the blockchain and only you have access to them. You are free.

A custodial wallet works like a bank. It can have a nice name like freewallet.org, but it is an opposite of free. When you use the freewallet and get some BCH to the freewallet address, you don't actually get it. The BCH is sent to the freewallet bank and held for you. You have to believe the freewallet bank has the money and won't take it away from you. Maybe she does and she is trustworthy, but what if she is not? Do you know what freewallet does with your funds? Can you control it? No, you can't. You have no control over your funds. You have to believe the bank, you have to trust the bank not to misappropriate your funds. It works like any normal bank, except you don't get interest on your money. It probably gets the freewallet bank.

Another example is the Wallet of Satoshi. This is a custodial wallet for using the Lightning Network. Because using Lightning Network is very cumbersome, I wrote about it here, smart services like Wallet of Satoshi have developed. This service advertises that it is simple and allows you to pay on the Lightning network without any hassle. Yes, it does, but how does it work? When someone transfers something to you you in WoS, you don't get the funds at all, they are in your WoS's account. It's like an account in a bank. When you transfer something to someone, WoS transfers it for you from your account to the recipient's account, just like a bank does. People use WoS and say they use Bitcoin. No, they use a bank that uses LN-Coin, a second layer coin, the sending of which is almost free of charge only in the Lightning Network. Every time they want to send LN-Coin in to real Bitcoin, they have to convert it against real Bitcoin, and pay a high transaction fee for it (WoS does this for the user and debits his account with the fees).

The situation in El Salvador is even much worse. There, people are supposed to use the Chivo Wallet. This is a similar wallet to the Wallet of Satoshi, except that it is a government wallet and that they have to provide several personal details to use the wallet. This means that the people of El Salvador will entrust their money to the government. It is very likely that the government will have access to all transactions, so they will know exactly what users are doing, what they are paying for and who they are getting the money from. In return, the user of the Chivo wallet get $30 in the form of LN Coins. Can you imagine it? People are supposed to sell their freedom for $30 dollars in a coin from the second layer, which doesn't even deserve the name Bitcoin.

What happens if freewallet or Wallet of Satoshi goes bankrupt at some point, or stops its service? What happens if at some point the government of El Salvador decides to levy tax on Wallet or simply keep the funds for itself? Is that so unlikely? There have been many times before. Do you think the citizens of El Salvador will sell they freedom to the government? I don't think so. They will probably pay out the $30 airdrop once and delete the Chivo Wallet.

Satoshi Nakamoto developed Bitcoin so that something like this could not happen. Everyone should be their own bank and be independent of banks and governments. Everyone should be able to send their money directly peer to peer to the recipient without intermediaries like banks and governments. Everyone should be free. What is happening now with El Salvador, but on the use of wallets like Wallet of Satoshi or freewallet completely contradicts the idea of Bitcoin. These people don't use Bitcoin at all, they use banks and in the worst case, like in El Salvador, a government bank.

Many BTC users misunderstand the word freedom. Bitcoin is not designed to give you financial freedom. Bitcoin is not designed to make you rich. It can't work, Bitcoin just can't make everyone rich. Bitcoin is designed to make everyone independent and free from the banks and the governments. That is the freedom at stake and that should be achieved through Bitcoin. That's what's special about Bitcoin and that's what Bitcoin was designed for. Unfortunately, most BTC hodlers (and probably many other crypto-buyers) don't get it. I hope that Bitcoin Cash users understand that and live the Bitcoin idea by using the non custodial Bitcoin Cash wallets.

If someone uses such things like freewallet, Wallet of Satoshi or Chivo Wallet, they simply haven't understood what Bitcoin was developed for. Sooner or later he will regret it. I don't know if Satoshi Nakamoto is still alive, but if he is alive and sees what has become of the Bitcoin BTC, he must be crying deeply.

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Avatar for Telesfor
2 years ago
Topics: Bitcoin, BTC, Wallet, Bank

Comments

This is worth reading and glad I did as I slowly understand now about custodial and non custodial wallets. I did not know about it before. Thank you for sharing it sir

$ 0.00
2 years ago

I guess all custodial wallets will need KYC and id documents to comply with regulation. I agree it is not exactly the idea, a custodial wallet is just like a bank.

I use a lightning wallet called 'bluewallet' which seems good I have a private key for that, I don't think it's a custodial wallet, maybe I am mistaken.

But yes I agree BCH users should not fall into the same trap, we should spend our coins directly and not use exchanges where possible. The low transaction fees on BCH means this is much easier than with BTC which has now become more of a store of value than digital cash.

$ 0.00
2 years ago

I guess all custodial wallets will need KYC and id documents to comply with regulation

No, you don't need KYC for WoS and WoS is definitely a custodial wallet.

I don't know bluewallet, but if you don't open any channels yourself, it is most likely a custodial wallet. Someone wrote something about it here.

https://bitcoin.stackexchange.com/questions/85122/how-do-custodial-lightning-wallets-work

$ 0.02
2 years ago

I see, then it must be a custodial wallet like you say, but it does not require KYC in any case I convert my lightning satoshi to BCH using 'Fixed Float' a great instant exchange which requires no registration. ๐Ÿ˜Š๐Ÿ‘

$ 0.01
2 years ago

Is that online wallet can be like bankrupt? I never thought this question before. Even previously we saw that in our country some government bank couldn't give the actual information about deposit money.

$ 0.00
2 years ago

Online wallet does not have to be bad. You have an online wallet here on read.cash, but you and only you own your seed. If you have an online wallet but don't know the seed, it's bad.

$ 0.00
2 years ago

Yeah.Thanks for clearing that issue. Anyway I know my read.cash online wallet seed words.

$ 0.00
2 years ago

I haven't read the details of the Chivo wallet, but that's kind of crazy. And sounds like an attempt to put hand on the money that people invest in crypto.

In Venezuela, the government tried to do get people money from cryptos with the Petro. Wich is a CBDC that was created a few years ago. In the end, people here don't want to know anything about it. And the Petro has been almost forgotten. I hope people in El Salvador don't fall into the trap. Governments won't stop in their attempt to control people's money.

A very informative post for people that don't have much idea of cryptos. I think education is the key. Many people came to crypto without knowing the risks and implications of things as basics as what kind of wallet to use.

$ 0.00
2 years ago

Yes, education is the key, that's why I write in to teach people. Thank you for your comment and the tip.

$ 0.00
2 years ago

Unfortunately this is how you point it out. But many people try to do things differently perhaps to make more profit without realizing the harm they could do to themselves.

$ 0.00
2 years ago

Thank you for the comment and the tip

$ 0.00
2 years ago

I love you very much my friend. Thank you for such easy to read and informative posts. Thanks to you for your great and unparalleled advice to all of us always. God bless you.

$ 0.00
2 years ago

This is really good I think I love that non-custodial wallet because I will be the only one that have access to it

$ 0.00
2 years ago

Seems that Brave continues to flag
that they have no interest in protecting their BAT users
from the predatory privacy practices of custodial wallets:
https://brave.com/gemini-user-wallet/

"Brave and Gemini partner to provide an integrated custodial wallet for Brave Rewards users
by Brave
Aug 31, 2021
Announcements"

https://archive.fo/BGhik

BAT goes on the "Do Not Trust" list

$ 0.00
2 years ago

Thank you, thatโ€™s a very informative piece. I already knew about the difference between these two, but I want to expand my knowledge about terminology in crypto world and in general get to know more about it.

$ 0.00
2 years ago

I still remember the first time i've read about custodial wallets. I was shocked and thought who is ever going to use them? Eventually this will be the way for BTC! It is laughable what has become of the BTC community.

$ 0.00
2 years ago

Yes, I think there is already almost no BTC community. There are only traders and hodlers. They don't care about Bitcoin.

WoS and especially Chivo Wallet is basically a cheek or you can even call it fraud. The user is made to believe that he owns Bitcoin, in reality he does not own it at all, he does not even own LN-coin. Maybe WoS has already lost the money at high interest rates. No one can check. If everyone wants to withdraw their funds from WoS at once and there is a bank run, WoS will probably not have enough LN-coins. In El Salvador it is even worse. A government will sooner or later confiscate people's money in some way. If not all, then some. No registration in the world can resist that temptation, especially not a government of a banana republic.

Thank you for the tip.

$ 0.00
2 years ago

People have forgotten that one of the major advantages and original purposes of Bitcoin was "trustlessness": one should not have to trust any third party, such as banks or governments. This feature is completely gone if you use a custodial wallet.

Good and needed article.

$ 0.00
2 years ago

Some have forgotten, some don't know, many don't care, as long as the return is right. There will be a rude awakening someday. Thank you for the tip.

$ 0.00
2 years ago