Custodial
A type of crypto wallet where a third party stores cryptocurrencies, and not their true owner.
Basics
- One of the terms often used in the crypto space when it comes to wallets and smart contract solutions. Custodial is the opposite of non-custodial, like permissioned and permissionless, centralized and decentralized, and private blockchains and public blockchains. It is all about who has the full ownership of the underlying assets, and in the case of the former examples, custodial, permissioned, centralized and private blockchains have a third party that can access your assets. With the non-custodial, permissionless, decentralized and public blockchains, these assets should in theory only be accessible by the user itself.
- From this blog (30-8-2020):
"A custodial wallet is a wallet in which a third party stores your private keys. It means that a third party gets complete control over crypto-assets while a user can only make permission to send or receive payments. The custodial wallet is similar to how a bank account works, there is no full control over your money inside of it — they do remains yours, but they are in the hands of another company.
Pros:
- Free Transactions
The most significant benefit of a custodial wallet is that it, unlike other wallets, does not demand transaction fees for transactions within the ecosystem. [This is not always the case, but many provide this service]
- Insurance in case of password loss
Since a third party manages custodial wallet, even if user loses password, key or forgets the mnemonic phrase, it is possible to regain access to the wallet and stored funds.
- Higher Backup Possibility
Another advantage of custodial wallets is that the central authority managing your wallet offers backup facilities that make it easier to undo any transaction or restore a previous version.
Cons:
- Third-party control
Custodial wallets users do not have autonomy, if they want to withdraw their funds their transaction has to be reviewed first. Also they are not able to properly participate in PoS consensus.
· Data Breach Threat
In custodial cryptocurrency wallets, users’ funds are stored in cold and hot wallet storage. Although these wallets are not an easy target for hackers, they are still vulnerable to security breaches.
- No Offline Facility
The Internet connection is a must for accessing the Custodial wallets.
- Chance not to receive forked/airdropped coins.
Users may not be able to receive full benefits they are eligible to if the wallet they are using chooses not to support forked or airdropped asset.
- Loss of access
In case of a wallet’s team misbehavior or for legal reasons users can be locked out of their wallet, blocked on the platform or have their account frozen."
