Custodial vs. Non-Custodial Wallets

Today we will look at the differences between custodial and non-custodial cryptocurrency wallets and why a Web3 developer needs one. This concept is crucial for users of the decentralized web.

Overview of Wallets

It is important to understand the cryptography that defines cryptocurrency wallets. You don't need to understand all the mathematics of the elliptic curve (although I recommend it because it's interesting); you need to understand the function of your private and public keys. I go into that in detail here. In summary, your private key is used to authorize your transactions and receive information. If you have a wallet's private key, you can access funds and authorize transactions. The private key is of critical importance. The exact protocol for generating the private wallet address can vary from network to network, but generally the public key is hashed and then used as the wallet address.

Why do Web3 developers need wallets?

To programmatically interact with decentralized networks, you need to send and receive information to and from the network. Bitcoin wallets allow you to do this. While people primarily use them to store cryptocurrencies, as a developer you need them to deploy services on a distributed ledger, i.e. smart contracts or Hedera's API. While anyone can read a public distributed ledger, no one can perform transactions on a distributed ledger without a wallet. The wallet serves as your anonymous identifier. Anonymity is taken seriously in some web3 developer communities, and developers are known by their public key. Hence the expression: "see you on-chain".

Trivia: Wallets on the Ethereum network with leading zeros use less fuel when storing information, as less storage space is needed to store these values. More information can be found here. As a result, you may see web3 developers online whose handles are the first few digits of their public key. The public key serves as evidence of their activity on the chain, as anyone can use a network explorer to view the activity associated with a public key. If you're interested in creating your own vanity wallet, check out this GitHub repository.

Wallet providers

It's helpful to think of wallet providers as a window that allows you to easily view and interact with your wallet. Most wallet providers you've probably dealt with have a convenient user interface like Exodus, Atomic, or Metamask that allows you to sign transactions and send cryptocurrencies with one click. However, it's important to know that your wallet is vendor-agnostic, meaning that once it's created, you can view and interact with it from any wallet software as long as you have the appropriate private key.

Custodial

A custodial wallet is managed by a third party, just like a central exchange. The third party manages your private key and authorizes your transactions for you. This is fine as long as you trust it. The benefits are aimed at non-technical users who don't want to keep track of their private data.

They have to decide if they want to have a free money and free disposal over it or give it into the hand like Zeus and Strike which are nothing else than Paypayl 2.0