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Blockchain Explained: Custodial vs Non-Custodial Wallets

Nov 21, 2020

(Photo Credit: Ewan Kennedy @EwanKennedy19)

If you have purchased cryptocurrency in the past, chances are you’ve used a custodial wallet. Any Bitcoin exchange like Gemini or Coinbase or Paypal is considered to be custodial. Those third-party cryptocurrency exchanges offer to protect your crypto assets for you, but in doing so, you relinquish full control over those crypto assets. These are also referred to as hosted wallets by most regulators, it is where the private keys are managed by a trusted third party.

Not your keys, not your crypto.

You’ve probably heard that old custodial cliche a million times. Seasoned crypto veterans often harangue new users about storing crypto on custodial, third-party providers for that reason… key ownership. However, these custodial wallet providers often have the high UI/UX that users are already familiar with when they use other banking applications. It’s hard to stay away from custodial solutions, especially for those who are brand new to crypto; but the reality is that the user relies on that third party to responsibly manage their assets and provide their funds back to them when they request to move them from their platform.

Yet, as easy as these custodial wallets are, crypto veterans often suggest something different. What do the seasoned veterans suggest?

Non-Custodial Wallets

A non-custodial wallet is a type of wallet that allows users to hold and own their private key while having full control of their funds. Keys are held in encrypted storage.

Currently, several different types of non-custodial wallets exist today:

  • Hardware Wallets: A physical device similar to a flash drive that is disconnected from the internet.
  • Web-Based Wallets & Mobile Wallets: These can be accessed from any device with a private key login.
  • Desktop Wallet: These reside on the desktop but can be stolen if the computer is taken away.

Non-custodial wallets remain tough to use. Traditionally, non-custodial wallets make users remember a 12–24 word seed phrase composed of random words to access an account. The phrase is used as a backup password recovery method. Additionally, custodial wallet providers force users to enter an equally long and perhaps even more confusing alphanumeric code to access a wallet (the private key).

Then, non-custodial wallets have a similar alphanumeric code they have to give in order to receive funds (the public key).

How Can Non-Custodial Wallets Improve?

Non-custodial wallet providers such as BRD Wallet, Argent, and Metamask have gone on to be worth tens of millions of dollars. The current generation of non-custodial wallets has experienced tremendous success despite requiring users to navigate through difficult seed phrases and long passwords.

Cryptocurrency is hard enough for beginners to wrap their head around. New users are challenged even more when they have to input old-world cryptographic expressions that more closely resemble alien hieroglyphics than a wallet with money. Users are more accustomed to financial applications that look like banking apps.

These non-custodial solutions are successful despite the UI/UX difficulty which shows that users demand non-custodial solutions. However, it also demonstrates a large opportunity to serve crypto holders who demand both key ownership and a high user experience.

Smart Wallets

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Next-generation wallet solutions like the Mogul Smart Wallet offer a user-friendly crypto storage experience that also grants users full control over their digital assets.

Easy-to-Use, Easy-to-Recover

The Mogul Smart Wallet’s decentralized recovery system delivers a smooth crypto experience with the high accessibility new users need. When you forget a password on Mogul, users go through a front-end experience that is similar to resetting a social media password. However, the user is actually asking their Guardian to change the address of the authentication wallet that has access to the private key . This looks like a simple password reset on the front end, but the private key is never shared with Mogul, so the user maintains custody of their assets.

Manual Transaction Signatures Eliminated

Another benefit of the Mogul Smart Wallet is that it eliminates manual signatures. When you use a DeFi wallet like Metamask, you need to manually confirm permission to allow a wallet to be accessed. However, with the Mogul Smart Wallet, users can send free and frictionless transactions.

In Conclusion

Custodial wallet providers are popular now because of the high UI, but their days are numbered because users demand more control over their crypto wallets. Non-custodial wallet providers have experienced tremendous success, however, the next generation will be even easier to use and thereby replace the antiquated seed and alphanumeric address process.

The Mogul Smart Wallet offers an alternative non-custodial solution that is easy to use without the need to confirm transactions manually.

Established in 2019, Mogul Productions is a blockchain-based film finance and production company with a presence in Canada, the United States of America, and Europe. Mogul’s platform connects contributors, film industry professionals, and fans through technology that allows all users to engage and participate with each project throughout its entire lifecycle.