Decentralization is the key idea of the blockchain technology. Despite game-changing and disruptive features, blockchain still has some hurdles related to security issues.
Almost every crypto enthusiast has the fear of losing their private keys, because they give a full access to the funds. Once lost, the keys cannot be restored and you will no longer control the savings, so you won’t be able to restore access to the wallet. Such wallets are called non-custodial.
On the other hand, if your private keys are stored by some wallet or third-party servers, no one makes warranty of the hack-proof. This is the hidden peril of every wallet service that doesn’t provide you with private keys. These wallets are called custodial.
If someone stores your keys,you DO NOT have a full control over your funds. When the third-party data is getting hacked, your money becomes exposed to a high risk to be stolen.
So let’s take a closer look at custodial and non-custodial wallets to find out all their pros and cons.
Сustodial Wallets are services and exchanges that don’t provide you access to private keys and store them on servers. The main advantage of custodial wallets is that you can restore access to your account in case you've lost your password. The bad news is they can freeze your funds in case of maintenance or due to KYC requirements. There is always a risk that your money may be stolen in case of hacking attacks.
For example, hackers stole about 700 BTC from one of the most famed Bitcoin centralized wallet: Blockchain.Info
The same is fair for centralized exchanges, as they are also prone to hacker attacks. The exchanges control your assets and may freeze your account without KYC/AML confirmation (KYC – Know Your Customer, AML – Anti Money Laundering).
Non-custodial wallets give you full control over your funds and in the most cases provide serverless solutions. The keys stored in an encrypted manner on the user's device and never leave it out. Your money is under your control, but there is also a drawback. If you lose your mnemonic seed, you will never be able to restore access to your funds.
For example, in case you brake your PC, it is stolen, or if you delete the app, you will be able to recover the access only with your seed phrase. What is seed phrase and private keys? Learn more about a seed phrase and private keys here.
Keys are generating by mnemonic seed. We strongly recommend you to store it on paper in two secured place. Do not store the phrase on your PC or as a photo on your mobile phone. The seed is even more important than the password of your wallet, since it generates the keys and restores the data. Back up the seed, write it down on a piece of paper, engrave on a piece of metal, store it in your safe or give it to your mom. Don’t lose the seed, under any circumstances!
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