Are noncustodial crypto wallets a practical option for the everyday hodler?
As crypto ownership becomes more commonplace, holders will need to consider how to protect and hold their assets. The safest option is to store cryptocurrencies in a personal wallet.
Crypto wallets are programs that allow users to store, send, and receive cryptocurrencies. Each wallet has a private key that allows the wallet to be used. Private keys are encrypted strings of code that allow the owner to spend funds within the wallet and prove ownership. Wallet information is also stored offline, reducing the risk of hacking. Everyday non-technical encryption users can benefit from increased security, but this may come at the cost of convenience, depending on their needs.
What is an escrow wallet?
A custodial wallet is an online cryptocurrency wallet that is managed by a third party, such as an exchange, after a user first purchases cryptocurrency. In other words, the exchange is the custodian responsible for holding the user’s cash securely and keeping track of the keys. The majority of client funds are held in refrigerated hardware wallets on major U.S. cryptocurrency exchanges.
Custody wallets are not as secure as non-custodial wallets. However, many still choose them because they are easier to use and involve less responsibilities. If users forget their Exchange account passwords, they may be able to reset their passwords through an established authentication process.
What is a non-custodial wallet?
With a non-custodial cryptocurrency wallet, the user is the sole guardian of their private keys and therefore the assets stored. A non-custodial wallet as it does not require a trusted third party and is in some ways more secure than a custodial wallet.
There are many different types of non-custodial wallets, including browser-based wallets, software wallets for mobile phones and computers, and hardware wallets. There are various formats of hardware wallets that are said to provide the highest level of security for storing cryptocurrencies. These digital currency wallets are similar to USB drives, but have a display and physical buttons.
Non-custodial wallet hiccup
Non-custodial wallets are easy to set up. For software non-custodial wallets, the holder needs to download the wallet, backup the recovery seed phrase, or a key containing a random 12, 18 or 24 character string, and set a password.
Also, if the user forgets their password, the seed phrase acts as a backup and they can still access their assets.
Beyond that, there is little support for hardware wallet users if they lose their keys or fail to take the necessary operational security measures to protect passwords and keys. If users lose, delete, or forget their keys, they risk losing access to their funds entirely.
Therefore, in order to adequately protect this information, non-custodial wallet users need to take additional steps to keep their passwords and wallets safe.
related: Simple steps to keep encryption safe
When securing seed phrases, the usual advice is to have users write them down on a piece of paper and keep them in a safe place. However, it is generally not recommended that users store their mnemonics in a text file on their personal computer or mobile device. For example, PCs and Android devices are susceptible to viruses, while notes stored on iPhones can be compromised if a user’s iCloud account is hacked. Therefore, the best practice for keeping mnemonics safe is to keep them offline.
There are other methods users can take to protect their seed phrases. For example, Serenity Shield is a digital storage platform that enables users to restore their seed phrases in the event of loss through its Strongbox feature. The seed information is on the blockchain as a non-transferable non-fungible token (NFT). This way, only the owner can access and read the information stored in the safe.
In addition to concerns about keeping them safe, the mechanics of sending transactions on non-custodial wallets can also be challenging for cryptocurrency newbies.
Most non-custodial wallets require users to pay transaction fees in the native cryptocurrency of the network the token is built on. For example, if a user wants to transfer Tether (USDT) on Ethereum, they need to deposit Ether (ETH) in their wallet to pay for gas. Therefore, users have to buy ETH and transfer it to their wallet before they can transfer USDT.
However, the exchange’s hot wallet enables users to pay transaction fees with the same token. For example, cryptocurrency exchange Binance enables users to pay for Tether transactions using USDT instead of ETH or the tokens of other networks it runs, such as BNB or Tron (TRX). Token transfers are simplified as users do not need to hold the network’s native tokens.
Some in the cryptocurrency space believe that non-custodial wallets are still not practical for everyday users who may not care about backing up their private keys.
Hsuan Lee, CEO of Blocto multichain wallet developer Portto, told Cointelegraph that when new users “get into blockchain applications for the first time, they don’t care if they have the keys, they just want to get started.”
Rodolphe Seynat, co-founder of digital storage and privacy platform Serenity Shield, told Cointelegraph: “Non-custodial wallets have a long way to go before they can be seen as a viable option for everyday use. Cryptocurrencies must be more widely adopted before they can be used for ordinary retail. Users provide general use cases,” adding:
“Having said that, I firmly believe that non-custodial wallets remain a safer, more secure, and more private way for users to manage their assets and prepare for the future.”
Over time, wallet providers have been working to make them more user-friendly. For example, both custodial and non-custodial wallets tend to remind users to double-check destination addresses to avoid loss of funds. There is even an option to use a button to automatically copy the address to further reduce the chance of any errors during the transfer.
Additionally, solutions like Coinbase Wallet allow users to set a username when creating a new wallet. Usernames make it easier for people to send and receive cryptocurrencies because they are easier to remember, reducing errors when transferring funds. The wallet also allows users to decide whether they want their wallet to be public (other Coinbase wallet users can search for their username) or private.
Regarding crypto transactions, because miners have lower priority, lower fees usually mean longer transaction times and higher fees mean faster speeds, which may not be widely understood by users. Therefore, many crypto wallets preset transaction fees at medium levels, allowing users to send transactions with average transaction times.
Therefore, sending coins using a non-custodial wallet can be frustrating for the average non-technical user. If users wish to send coins on a regular basis, they may find a custodial wallet more convenient. On the other hand, when it comes to long-term storage and custody, non-custodial wallets are the best option, as long as the seed phrase is kept safe.