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Since Satoshi Nakomoto introduced bitcoin in 2009, there has been sporadic adoption of cryptocurrencies as a medium of exchange and for digital payments. These cryptocurrencies are, however, stored in web3 wallets, which hold these cryptos until they are needed for use. Essentially, different types of web3 wallets are used to store and carry out cryptocurrency transactions. 

What is a web3 wallet?

A web3 wallet is a program that allows users to send, receive, and store digital currencies while also interacting with the blockchain. Users can interact with the blockchain through these web3 wallets. Wallets for cryptocurrencies can be online or offline. 

A web3 wallet uses two major components.

  • The private key 
  • The public key 

Types of web3 wallets 

Wallets are classified according to whether they use the internet or have access to private keys. There are two types of crypto wallets based on internet usage: 

Hot wallet

Hot wallets are online wallets that allow users to send, receive, and store cryptocurrencies with the use of internet access. In order to work, most hot wallets require internet access. 

Hot wallets are one of the most convenient ways to use cryptocurrencies because they are easy to use and allow for quick cryptocurrency transactions. Mobile wallets, web wallets, and desktop wallets are examples of hot wallets. 

Cold wallets 

A cold wallet is an offline wallet that allows users to store cryptocurrencies without having to connect to the internet. Cold wallets, as the name implies, store cryptocurrency private keys in offline devices such as a USB flash drive, a piece of paper, or a QR code. 

Cold wallets are considered to be one of the safest ways to store cryptocurrency when compared to hot wallets, which are vulnerable to hacker attacks. 

However, hot wallets are easier to use than cold wallets because they allow for faster transactions with available cryptocurrency. Examples of cold wallets include paper wallets, hardware wallets, etc.

Crypto wallets are classified as custodial or non-custodial depending on who has control over the private keys. 

What is a public key 

A public key is a cryptographic code that is generated alongside the private keys and is used to facilitate cryptocurrency transactions between different parties, allowing users to receive cryptocurrency in their wallets. A public key can be shared because it is typically in the form of a wallet address. A private, on the other hand, cannot be shared. 

What is a private key 

A private key is a long string of numbers generated using cryptography that serves as the password for a cryptocurrency wallet. Because private keys provide access to the crypto wallet and sign transactions, they must be kept private. When a crypto wallet is created, the private keys are either held by a third-party custodian or given to the user, depending on the type of wallet. 

A private key can take different forms, such as a 256-character long binary code, a  64-digit hexadecimal code, a QR code, or a Mnemonic phrase.

What is a custodial wallet? 

A custodial wallet, as the name implies, is a type of wallet that controls and stores users’ private keys in a database. Custodial wallets are more popular because they are more widely used. Because these wallets store the users’ private keys, the users have no direct control over their crypto assets/funds. 

Custodial wallets can be advantageous because private keys are typically long and difficult to memorize, making it difficult to remember these sequences. Furthermore, there have been reports of users misplacing their private keys, resulting in a permanent loss of access to cryptocurrency funds. 

Using a custodial wallet means completely handing over complete access to crypto assets to a third party as private keys are stored in their database. While using a custodial wallet, it is essential to do so with a reliable custodial service. 

Advantages of Custodial wallet 

  • Easy recovery of funds in the event of loss of a wallet password
  • user-friendly interface 
  • Usually easy to use 

Disadvantages of a custodial wallet 

  • Users have no control over funds or private keys. 
  • Lengthy KYC and AML procedures 
  • Connection to the internet makes custodial wallets susceptible to hackers. 
  • High transaction fees 

What is a non-custodial wallet? 

A non-custodial wallet is a type of wallet in which total access and control over private keys are given to the user. Non-custodial wallets do not store users’ private keys in any database, as full control of funds is handed to the user. These wallets also allow users to store crypto-assets such as cryptocurrencies, NFTs, etc., securely and privately. 

Non-custodial wallets are needed to interact directly with decentralized applications. These types of wallets are usually preferred as they provide privacy, security, and anonymity. Examples of non-custodial wallets include Trust Wallet, Metamask, Robinhood Web3 wallet, etc. 

Non-custodial wallets are beginning to gain more traction as they offer privacy and security to users. Custodial wallets often require KYC verification to identify users and store private information, whereas non-custodial wallets do not need KYC verification for users to interact with the interface. 

An example of companies embracing non-custodial wallets would be Robinhood, announcing the launch of the Robinhood Web3 wallet, which would enable users to send and receive cryptocurrencies while having full control over their private keys and funds. 

Types of non-custodial wallets

Non-custodial web3 wallets could be in the form of 

  1. Web-based wallets such as Metamask, Trustwallet, Robinhood web3 wallet, etc. 
  2. Hardware wallets such as Ledger Nano X, Trezor Model T, etc. 
  3. Mobile wallets such as Metamask and Trustwallet have mobile apps as well. 

The advantages of non-custodial wallets

  • Low transaction costs 
  • Users have control over funds and access. 
  • It is more secure as private keys are not stored in a database. 
  • No KYC required 
  • Withdrawal speed is faster as there are no withdrawal procedures needed.
  • Interaction directly with decentralized applications

Disadvantages of Non-custodial wallets 

  • Permanent loss of funds in the event of the loss of private keys 
  • less user-friendly interface.

Differences between custodial and non-custodial wallets

Custodial wallet

Non-custodial wallet

Recovery of funds

Funds are easier to recover as private keys are stored in a service provider database.

Funds are impossible to recover once private keys are lost as they aren’t stored in any database.

Ease of use

A more beginner-friendly interface and easier to navigate

It’s not so easy to navigate, especially for newbies.

Control of funds

Funds are controlled by the service providers.

The user has complete control over funds used and access.

Security

Users’ information stands at the risk of hacking since user information is stored over the internet in a database. 

User information is more secure as there are no records of data stored.

Conclusion 

Securing funds is one of the most important aspects of the web3 space, and in order to do so, it is critical to select the most appropriate type of web3 wallet to store funds. 

Before making any decisions, it is critical to weigh the advantages and disadvantages of each type of wallet. Although non-custodial wallets provide privacy and control over funds, users must be cautious not to lose their private keys, as this will result in the permanent loss of crypto assets. 

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CryptoWhat
CryptoWhat was created in 2015 and has become one of the most trusted and well-respected sources of information on all things crypto. The blog's authors are dedicated to providing clear, concise, and jargon-free explanations of this complex technology, so that everyone can understand it.