What Is a Self-Custody Wallet and Why You Need One
31 January 2023
TL;DR:
A self-custody (or self-custodial) wallet is a crypto wallet that gives you access to your wallet’s private keys, and lets you secure them with additional measures. Self-custody wallets provide greater autonomy and control over your assets, and this makes them an indispensable part of Web3 and the decentralized web.
If you’re a crypto holder or have held any cryptocurrencies in the past, you’re probably very familiar with the variety of crypto wallets out there.
It’s a common misconception that crypto wallets work as regular wallets — in that they actually store the holder’s cryptocurrency holdings inside them. But in reality, a crypto wallet is a software tool that helps you access your funds on the blockchain and facilitate transactions between different parties on the blockchain network.
Two of the most important categories of crypto wallets you must consider when you're choosing a wallet to store your funds are custodial and self-custodial wallets.
While custodial wallets control your private keys and store them, self-custody wallets give you full responsibility for your private keys. This grants you unfettered access to your funds on the blockchain using any self-custody wallet of your choosing, letting you perform transactions and use smart contracts without requiring permission from an intermediary or centralized authority. You have the reins to do as you wish with your crypto.
In this article, you’ll learn what a self-custodial wallet is, why you need one, and how to get one, and you’ll get all your questions about self-custody crypto wallets answered.
What is a Self-Custodial Wallet — a.k.a Non-Custodial Wallet?
A self-custodial wallet is a type of crypto wallet where you, the user, hold the private keys to your digital assets rather than entrusting them to a third-party custodian like a centralized crypto exchange. A self-custodial wallet is also known as a non-custodial wallet. In this article, we use both terms interchangeably.
When you are comparing custodial and non-custodial wallets, what’s actually under custody isn’t the funds inside them. It’s the private key necessary to gain access to those funds. The main difference between the two options is who has custody of the wallet's private keys.
Custodial services like cryptocurrency exchanges hold onto the private key instead of the user. This means the service or exchange is responsible for protecting the user’s crypto assets — almost exactly like an ordinary bank
In self-custody alternatives (such as Valora), the responsibility for protecting your private keys is entirely yours. This gives you full authority and control over your funds, but that authority carries the additional responsibility of having to protect your private keys. You can think of this as similar to having your own safe — you alone control your money, but that means you also need to protect the keys!
The question of whether or not you need a self-custody wallet will depend on your personal preference, your investing goals, and how you plan to use crypto in your daily life.
To help you make a better, more informed decision, we've brought together five of the biggest reasons why you might want to consider getting a non-custodial wallet.
5 Reasons Why You Need A Self-custody Wallet:
1. Control. Control your private keys (and your assets)
If you use a custodial wallet, the service provider acts as the third-party owner of your private keys and your mnemonic passphrase. Before you complete any deposit, trade, or withdrawal, you must receive clearance from that third party, whether it's a centralized exchange or another wallet provider.
Popular exchanges like FTX and crypto lending company Celsius made an internal decision to stop allowing users to trade or withdraw their assets, resulting in catastrophic losses.
This cannot happen with a non-custodial wallet because your assets are under your control. You're the only one who has access to the recovery phrase and you have full authority over your assets on the blockchain network.
2. Security. Secure your private keys with additional measures
Because your private keys are in your hands, you can take additional security measures to protect them (and with them, your assets on the blockchain.)
Multisig wallets that require multiple signature authentications before authorizing a transaction
Password managers that store and secure your passwords
Hardware wallets that store your keys offline
Cold wallet storages like a USB drive or external hard drives that can be encrypted
Paper wallets in which you write your private keys down on a piece of paper and store them physically in a secure location
With self-custodial wallets, your account's safety, security, and privacy are entirely in your hands. It’s still important to do your due diligence and find a combination of options that keep your private keys secure and guarantee that your digital assets can only be accessed by you.
3. Autonomy. Join a vast, open financial ecosystem and interact with dapps on the blockchain
The world of Web3 has a vision of achieving a decentralized, open, and more equitable Internet by using blockchain technology. In that vision, users have full control of their data, their online identity, and their crypto assets without needing intermediaries or a centralized authority.
So, when you have a non-custodial crypto wallet, you immediately contribute to making that vision a reality.
With a non-custodial wallet, you'll be able to interact with decentralized applications (dapps) on the blockchain. Some examples include decentralized crypto exchanges, DeFi platforms, lending platforms, gaming platforms, social media platforms, and so much more.
You'll act as an autonomous entity in the web3 ecosystem, freely interacting with applications and smart contracts and engaging in crypto transactions.
Further reading: What are dapps? Learn more about dapps inside this article on Valora Learn.
4. Privacy and transparency
Most non-custodial wallets do not require users to submit any vital personal information. They’re also not subject to the same regulations as custodial wallets, so they don’t require users to provide the same data.
This also means no third party has access to any user data, making non-custodial wallets better for users who want to maintain their privacy. With Valora, you can get your self-custody wallet created and ready to go with just your phone number. See this article for step-by-step instructions.
While self-custody options are more private than custodial wallets, they also provide the same transparency as all transactions are recorded on the public blockchain.
5. Flexibility. You'll have more flexibility within the Web3 space
Non-custodial wallets are more flexible than custodial options because they allow users to freely move their assets and interact with the blockchain directly.
They allow users to:
make transactions without intermediaries;
create and manage multiple wallet addresses;
easily move accounts from one device to another;
add custom tokens to their wallet;
access their assets across a variety of devices and platforms; and
interact with decentralized applications on the blockchain.
Ultimately, these factors make self-custody wallets more flexible than custodial wallets. That flexibility translates into more freedom for you, the user, who wants to have complete control of their crypto assets anytime, anyplace.
What About Hardware or Cold Storage Crypto Wallets?
Comparing Cold vs. Hot Wallets
A cold wallet is often referred to as cold storage, and it’s a type of non-custodial wallet that’s not connected to the Internet.
This means your private keys are stored offline, further decreasing the risk of hacking or theft. A great example of a cold wallet could be a USB drive or the so-called paper wallet.
On the other hand, hot wallets are connected to the Internet. Naturally, this means they store your keys online. Hot wallets are more suitable for users who want quick and easy access to their assets for spending or trading purposes. Cold wallets are better for long-term holding and storage.
Comparing Hardware vs. Software Wallets
A hardware wallet is a physical device that’s usually no larger than a USB. This device stores your private keys offline, keeping them safe from hacks or exploits. When connected to a computer, the device allows its user to access their assets. On the other hand, software wallets are often available on mobile devices and are usually more accessible.
Although there are many different wallets and wallet providers out there, cold and hardware wallets are both non-custodial wallets. This is because both types give a user direct, and sole access to their assets on the blockchain, the key element of self-custody.
Non-Custodial Crypto Wallets for Long-term HODLing
Non-custodial wallets have proven to be valuable tools for storing assets in the long run. Large-scale, long-term crypto investors prefer using self-custody wallets because of their increased autonomy and reliability.
If you want to hold crypto in your wallet long-term, it's important to weigh the pros and cons of custodial and non-custodial wallets and decide whether they're the right option for you.
Even though non-custodial crypto wallets provide you with that extra layer of security by giving you full access to your funds on the blockchain, they come with additional responsibilities.
Because you – and you alone – are responsible for protecting your private key and your recovery phrase, you should know that losing your private keys or damaging certain hardware can potentially lead you to lose your assets. Recovery options are limited, and recovery of funds is difficult.
How to Get A Self-Custody Wallet
If you want to start your crypto journey off on the right foot and tap into the enhanced security and higher autonomy of self-custody crypto wallets, Valora is here to help you do exactly that.
Explore our simple, 4-step guide to creating a Valora wallet and you’ll have your own self-custody wallet ready to go in just a few minutes with just your phone number.
Further reading: Get started with Valora
Unsure what type of wallet you need? Read this article by Valora on choosing the right wallet for your crypto journey.
FAQs
Is a non-custodial wallet a cold wallet?
Cold wallets are a category of non-custodial wallets. Some of the most popular types of non-custodial wallets are cold wallets.
Is Valora a non-custodial wallet?
Yes. Valora is a self-custody wallet built on the Celo blockchain. Self-custody and non-custodial mean the same thing – that every Valora wallet owner has full control of their assets at all times.
Can a non-custodial wallet be hacked?
It's virtually impossible to hack a non-custodial wallet. Any hacker would need to have access to your mnemonic seed phrase or private key. If you keep them safe and never share them with anyone else, your wallet may be impervious to hackers.
Do I still need to buy crypto on an exchange with a self-custody wallet?
Most self-custody wallets do not provide you with the option to purchase cryptocurrencies; they are primarily a way to store and manage your crypto. Others integrate a variety of payment networks and processors to allow you to buy crypto and fund your non-custodial wallet with your fiat money. For example, Valora gives you the opportunity to purchase stablecoins such as Celo Dollars (cUSD) and other tokens native to the Celo blockchain, directly in the app.
