Technology

What are digital wallets with and without custody

Digital wallets are used to transact with crypto (El Salvador).  EFE/Rodrigo Sura
Digital wallets are used to transact with crypto (El Salvador). EFE/Rodrigo Sura

When looking to transact with cryptocurrencies either NFT it is necessary to have a digital wallet for this type of asset. They are tools to interact with the blockchain or block network and manage the cryptos through them: buy, sell, transfer, etc.

First of all it is important to understand that There are two types of keys: public and private. Public keys are data such as a bank account number or an email address, which can be shared with other users in order to carry out transactions. In short, they identify the account.

Private keys, on the other hand, as their name indicates, cannot be shared publicly. They are keys, which work like passwords, and allow access to assets or funds hosted on the network.

These are formed by a sequence of numbers and letters that are derived from the initial phrase or seed which is generated when a crypto wallet is first set up. That seed phrase consists of a series of 12 or 24 easy-to-remember terms that serve as recovery of the private keys of a wallet.

There are two main types of crypto wallets: with custody and without custody. In the first case, there are third parties that store the private keys, while in the second, that information remains in the hands of the owner.

Metamask is an example of a non-custodial wallet
Metamask is an example of a non-custodial wallet

Benefits and contraindications

One of the benefits of non-custodial wallets it is that the owner has all the control and this can be seen as a positive thing by some type of people.

They are open to be used by everyone and it is not necessary to verify the identity of the person (with name, surname, document) to open an account and start trading.

The operating costs are low and they are the wallets that were used from the beginning when Bitcoin and other crypto currencies emerged.

However, these wallets can also be a problem if certain precautions are not taken. If the private keys are lost, for example, that user will no longer have access to their crypto assets.

It is estimated that about 20% of the 18.5 million Bitcoins in existence they are in wallets that their users cannot access because they have lost their keys.

If the private keys are lost, for example, that user will no longer have access to their crypto assets
If the private keys are lost, for example, that user will no longer have access to their crypto assets

The same could also happen if the person who has that data dies and did not leave the information recorded anywhere. Your heirs will not be able to access that data.

Trust Wallet, Coinbase, and MetaMask are some examples of non-custodial wallets. As already mentioned, in these cases the user must take care of remembering their private keys and the seed phrase. That information can be written down on paper and kept in a safe or stored on a device not connected to the network.

Unlike those types of products, in custodial wallets, the private keys are managed by a third party. Therefore, if you opt for this option, it is important to choose a reliable provider..

The benefit of these wallets is that the assets can be accessed if the password is forgotten, since a customer service and different mechanisms are offered to verify the identity of the person.

In this type of product, it is usually required to validate the user’s identity and the system may ask them to upload documentation, take a photo or record a video, for example, to verify it.

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