Custodial vs. non-custodial NFT marketplaces and wallets.
- The popularity of the Decentralized ecosystem is growing all around.
- NFTs are becoming increasingly popular among crowds for their efficiency.
- After buying NFTs, you can trade, sell or hold onto these assets.
As NFTs are something new, there are multiple questions regarding them. NFTs are proof of ownership, but when created or bought, who has control over it? This is further discussed in this article.
- According to the dictionary, Custody means care or guardianship of someone or something.
- Custody in the Crypto world means Custody of the wallet holding and assets.
- You can control your crypto assets and wallet completely or let a trusted company have Custody of it.
Before discussing Custodial and Non-Custodial wallets, let us discuss what a crypto wallet is.
- Just like other wallets but store Cryptocurrencies.
- A crypto wallet helps hold created, purchased, and traded NFTs and Crypto assets.
- From making transactions on the blockchain for peer-to-peer transactions, Crypto wallets are essential.
- What are Crypto keys?
- Crypto wallets contain more than one pair of keys, one public and one private.
- The keys are alphanumeric sequences that have lengths of 25 to 36 characters.
- The wallet provides these two types of keys for the user’s account.
Public and private keys
- Public keys act as an address to which transactions can be made digitally.
- It is just like sending the link to a website when you want to share something with someone.
- The Public Key is the link to your wallet to address someone who wants to send digital currency to your account.
- Public KeyKey is only used to encrypt your messages.
- Public keys are generated using private keys.
- The public keys use one-way hash functions to get public addresses that can be shared to transfer funds.
- Private keys cannot be back-engineered from public keys for unethical purposes.
- Private keys provide access to your wallet and should only be shared with limited and trusted parties.
- Private keys allow access to your funds and transfer them as required.
- A private key is a simple way to Encrypt and Decrypt messages.
What is encryption?
Encryption is the process of coding messages so that only very few parties with specific authorization can access them. Encryption is essential for sending messages in a secure way to people.
There are two types of Encryption:
- Works only on the public Key.
- Used for encrypting data in the servers.
- Works on generating a couple of keys private and a public key.
Public key Cryptography can be discussed further on this topic as it is the new Incoming technology that will be widely used in wallets.
Public key cryptography
- Public key Cryptography is a type of asymmetric cryptography.
- It uses both public and private keys. This is important for the computer security and cryptography ecosystem.
- Cryptography uses Encryption to secure data from third parties.
How does public cryptography work?
- The Public Key is used by the sender, encrypting the message to be sent.
- The private KeyKey decrypts this message so that the user can understand it.
- The Public Key can be shared without compromising the security of the private one. It creates a system for sharing data and sending cryptographic assets on the chain.
Now that all the technologies we understand what crypto wallets are and all the technologies used in them, we can go on to understand the types and differences between the classes.
There are 2 types of crypto wallets – custodial and non-custodial
1. Custodial Crypto wallet:
- In a custodial service, the Platform on which you have the NFT collections owns the Private Key for your wallet.
- This private KeyKey gives them access to hold onto your assets and provide Custody.
- In a custodial crypto wallet setting, you need to get complete control of the public and private keys.
- An intermediate is present who takes care of the wallet and needs to be contacted for access and transactions from the wallet.
- This is not a completely decentralized approach but provides an immense amount of safety and management, which is essential.
2. Non-custodial crypto wallet:
- In a non-custodial wallet, users have complete control of the wallet and digital assets. The users can trade peer-to-peer from their wallets and make transactions at any time.
- This creates a marketplace without intermediaries and also supports the idea of decentralization.
- The responsibility of keeping the private key safe is entirely upon the owners. Any loss of the KeyKey or misplacement will make users lose all their funds.
- The wallet’s owner is the sole person entirely responsible for the privacy and security of the wallet and its management.
- No registration is required, and creating a non-custodial wallet is quite simple.
Which wallet should you consider using?
A few features should be considered before using wallets, as they store your valuable assets. Here are some things you must consider before choosing and wallet.
- Ensure your wallet supports the NFT token standard you want to own and store.
- Each bar has its own set of rules for token creation and ownership.
- ERC-1155 and ERC-721 are commonly used.
- ERC-1155 is still in development and is less widely accepted by all platforms.
- ERC-21 is what is widely accepted NFT standard and is used everywhere.
Binance is an example of a custodial crypto wallet. Metamask, Trust, and Math wallets are examples of non-Custodial wallets.
Things to consider before choosing a wallet
- It is a prominent and essential factor depending on your requirements and usage.
- Custodial NFTS need to precisely promote complete decentralization.
- There is a KYC clause, and your identity cannot stay anonymous.
- Some formality should be completed without fail before accessing the wallet.
- In the case of non-custodial wallets, there are no KYC complaints, and the wallets can be accessed anytime without any registration.
2. Transaction cost
- Since custodial platforms provide security and other services, they also charge for providing user-friendly management experiences.
- On the other hand, charges for non-custodial services are lower and have a lower-level interface for the Platform.
3. Security and Support
- Security is a very prominent aspect, as the cost of assets is at stake.
- In the case of custodial NFTS, the wallet is under the user’s name. Still, the service provider has Custody of the Private Key.
- In the case of non-custodial security, infrastructure is less rigid and mostly non-existent.
- The user is only provided with a platform, and all other technicalities should be taken care of by the user.
- Unique mechanisms should be applied for maximum and complete security.
- Support is critical in case of a mishap, and required custodians places are trained to provide excellent support.
- Non-custodial wallets have fewer features as the customer is not known. So they cannot be retrieved back easily once the funds are gone.
NFTs that need to be stored in wallets should be purchased or bought from somewhere, and NFT marketplaces are precisely for this. NFT marketplace acts like a platform for making people wanting to buy or sell, or trade meet commonly.
The NFT platforms/marketplaces can further be divided into custodial and non-custodial
1. Decentralized platforms (non-Custodial)
This method consists of a decentralized exchange. It can be used when trade or purchase between two parties of interest within their wallets is peer-to-peer.
2. NFT marketplaces (Custodial)
NFT marketplaces act as an exhibition for people who want to explore various collections and purchase new NFTS that could benefit them. These platforms provide the opportunity to bid on NFTS, and transactions between owners can take place by integrating their wallets into the Platform.
Features of custodial NFT marketplace
- A simple way brings potential buyers to sellers.
- User-friendly and accessible for newcomers to use and navigate, all your wallets are protected with a private key owned by the marketplace. This gives you nothing to worry about as it is entirely secure.
- You have a platform always ready for support and help.
Features of non-custodial NFT marketplaces
- Provide much control of the entire transaction process to the users
- No external fees and more privacy.
- New users can find it hard to navigate and understand. Still, they can be used when X security is required, and identity does not want to be revealed.
From the above, it can be understood that the options cater to different demographics, and the ultimate choice should be made based on your need and usage. It is straightforward to shift from one platform to another when required, but security is the only thing to be kept in mind first.