Many of you by now have probably read or heard about the collapse of FTX, a centralised crypto exchange that has affected many crypto investors, leading to over a million people and businesses that have lost their funds. There are important lessons to be learned here, especially in relation to crypto wallets. A few months ago we wrote about what crypto wallets are and the differences between hot and cold wallets (if you missed it you can read about it here), this time we will dive into another point of differentiation for crypto wallets, namely Custodial and Non-Custodial wallets. It is important to know the differences between these two types of crypto wallets in order for you to make the right decision on where to store your funds.
Custodial wallets are basically where your assets are held in custody or managed by a third party for you and are usually provided by centralised crypto exchanges such as Coinbase, Huobi and FTX. The wallets are designed to be user-friendly and hence easier for those new to crypto to use, as users do not need to manage their private keys. In this case, the private keys are entrusted to the third party which can reset the password in case you happen to forget your password. This is useful as there have been many cases where people have lost their crypto assets after losing their private keys.
However, custodial wallets do come with several downsides and one of the main ones is the fact that your private keys are controlled by a third party. This means that you do not have full control of your funds and also run the risk of a third party misusing the funds. This was apparent in FTX case. Custodial wallets are also, due to their centralised nature, vulnerable to theft/hacks and users run a higher risk of losing their funds to hackers.
Generally, custodial wallets are popular still as they are easier to use and involve less responsibility but it involves the users “trusting” the exchange or service provider who is entrusted with the private keys. Some examples of custodial wallets are the wallets provided by centralised crypto exchanges such as Coinbase, BitMex and Binance.
Non-custodial wallets are basically wallets where users own and keep their private keys and are the sole guardians of their funds. The users have complete control over their private keys along with their funds, in other words, your assets are truly yours. There are no third parties involved and these wallets are considered more secure than custodial wallets, as users will not run the risk of any third parties misusing their funds.
Transactions using non-custodial wallets are also generally faster as users do not have to wait for approval and transactions are reflected on the chain in real time. In addition, users will not have to worry about extra custodial fees, which are charged (or included in the charges) by a custodial wallet service provider. Non-Custodial wallets are also considered safer as the risk of data being stolen or hacked is less, as the whole information remains with the users and not at some centralised location (unless the user shares the details with someone else or the device gets stolen). Some non-custodial wallets can also be accessed offline as opposed to custodial wallets which must have an internet connection to access.
There are some drawbacks with non-custodial wallets however, one of them is backup and recovery possibilities. Since the users are the sole authority over the private keys, if you lose the keys there is no way to retrieve or reset them. However, there are certain non-custodial wallets where holders get a recovery seed phrase and set a password. If users forget their password, the seed phrase serves as a backup by which they can still access their assets. Unfortunately, if the users lose or forget their seed phrase and password, they risk losing access to their funds entirely.
Another reason which hinders users from choosing non-custodial wallets is due to the fact that it is seen as less user-friendly, which tends to be a problem for newcomers. However, non-custodial service providers are fast evolving to make it more user-friendly which would help with mass adoption. Examples of non-custodial wallets are Metamask, Ledger, and Trezor.
So, which wallet to choose?
First of all, you should ensure that the wallet you use supports the type of crypto you wish to store, as different blockchain networks run different types of cryptocurrencies. Once this is known then it depends on what you prefer. If you are looking for a service provider that can take care of your assets and are looking for an easier, user-friendly wallet, you can consider a custodial wallet.
On the other hand, if you prefer to have full control over your assets and want to use blockchain technology to interact with DeFi applications, and are generally looking for a more secure way of storing your crypto assets, then non-custodial wallets are the way to go.
If you are a merchant who is considering accepting crypto as an alternative form of payment from your customers and are thinking about which wallet to use, we at Paywong make it easier for you. We will automatically provide each user with a non-custodial Paywong wallet to get you started. This wallet is unique to your email and will be used to receive all incoming funds. You can then transfer your assets to and from the Paywong wallet just like a regular wallet. If you have already chosen and are using a certain wallet, you can easily connect your wallet via the Paywong dashboard which accepts most of the popular wallets out there.
With Paywong, anyone can accept crypto payments, including stablecoins, from anywhere in the world with low transaction fees, with or without a website. The startup is also working with a third-party off-ramp solution to allow its users to convert crypto to fiat in real time. Paywong is a non-custodial crypto payment gateway that provides merchant services for businesses that cater to all kinds of customers. In addition, Paywong is also useful for individuals who are working as freelancers and want to get paid for their services in crypto via Paywong’s crypto invoicing service.
Paywong has launched a payment gateway that comes with an intuitive dashboard for managing funds, e-commerce integrations, and an invoicing system that generates a payment link that anyone can share. Book a demo to learn more, and you’ll be accepting cryptocurrency as payment from your customers in no time.
About The Company
Paywong is a product of Walawong Solutions Pte Ltd — a Web3 startup based in Singapore. We are on a mission to simplify crypto payments for businesses by leveraging the power of blockchain technology.