What is a non-custodial wallet? A beginner's guide
Our explainer on non-custodial wallets covers how they work, the benefits of self-custody, and how you can use them for your crypto assets.
By Mrig P
While there are many types of wallets you can use to store your crypto, they can broadly be narrowed down to two categories: custodial wallets and non-custodial wallets.
Custodial wallets hold private keys on your behalf and require you to trust a third party to secure your funds. While this lowers your personal responsibility, it also means you do not have complete control over your funds.
Non-custodial wallets, on the other hand, offer you complete control over your funds.
This article explores how non-custodial (self-custody) wallets work and the different ways in which you can use them.
What is a non-custodial wallets?
Non-custodial wallets are cryptocurrency wallets that enable you to hold and send digital assets without the need for a centralized intermediary like a bank. Also called self-custody wallets, they are used to securely store crypto assets and can interact with decentralized finance (DeFi) protocols and decentralized applications (dApps).
These wallets use a private key and public key pair to store assets and help users conduct transactions.
A private key is like your internet banking ID and password that proves that you own a wallet and the digital assets associated with it. A public key, on the other hand, is generated using the private key and is like your bank account details that you share with others to receive cryptocurrencies from other wallet holders.
Another concept closely related to the private key is the seed phrase or mnemonic phrase: a 12, 18, or 24-word pattern your wallet generates when it’s first set up.
Unlike a private key that allows you to access only one wallet address, the mnemonic phrase gives you access to the crypto assets stored in all the accounts within a crypto wallet.
Having the seed phrase means gaining or recovering access to your digital assets even if you lose your hardware or software wallet.
So, it goes without saying that you should keep your seed phrase safe, as anyone who knows your seed phrase can import a copy of your wallet and steal your funds.
What is self-custody?
Self-custody refers to having total control of your private keys and, consequently, the crypto assets associated with them. When you have self-custody over your assets, no centralized third-party or financial institution can censor transactions and confiscate your assets.
Another advantage of self-custody is not having to wait for withdrawal approvals, resulting in faster transaction times.
Note: A crypto wallet doesn’t store your assets, but rather the public and private keys that prove ownership of assets that live on the blockchain.
What are the different types of self-custody wallets?
Self-custody wallets are classified into different types depending on the device on which they store your private keys.
Mobile wallet
Mobile wallets, as the name suggests, are self-custody crypto wallet applications that enable you to send and receive crypto assets using a smartphone. You can find some popular mobile wallets like MetaMask, Trust Wallet, and Argent in your app store.
These wallets only store private keys on your mobile device. In case you lose the mobile device with your private key, you can use your mnemonic phrase to recover your assets.
Smart contract wallet
Non-custodial wallets, whether they’re mobile, web-based, or “cold” wallets (wallets that store private keys offline), have a serious limitation: whoever has access to your private keys also has access to your assets.
A smart contract wallet overcomes this by assigning “guardians” (trusted third parties) that can sign a special transaction to change the registered signing key in the contract to a new one if you lose your key. That way, when you lose your keys or suspect someone else has access to them, you can change the keys to prevent anyone from stealing your funds.
You can also set transfer limits to prevent hackers from emptying your wallet if it is compromised.
In other words, you can use a smart contract wallet like a regular non-custodial wallet and sign transactions with a single key. But unlike regular wallets, you don’t need a seed phrase to recover your wallet. You can simply ask your guardians to recover your wallet for you.
Hardware wallet
A web-based or mobile wallet, also called a “hot” wallet, is always connected to the internet. This unfortunately gives hackers the opportunity to steal your funds.
This is where hardware wallets, or “cold” wallets, come in. Hardware wallets are hardware devices that keep your private keys offline at all times. Since they connect directly to the internet, they’re used with another device like a PC to make a transaction and display your balance.
Here’s what the typical transaction process on a hardware wallet looks like:
A user unlocks and connects (using USB or Bluetooth) their hardware wallet to an internet-connected device
The user then connects their wallet to a decentralized application and conducts a transaction that is sent to the hardware wallet
The user verifies the information shown in the transaction request
The PC receives the confirmation and broadcasts the information to the blockchain
Desktop wallets
Desktop wallets are programs that allow you to manage and store your private keys on a computer hard drive.
They work the same way as mobile wallets: the device stores your private keys, which you can use to sign transactions.
The process of recovering assets is also similar. You simply need to enter the seed phrase correctly on a new device and the desktop wallet will retrieve your assets for you.
Desktop wallets are more secure than mobile wallets but less secure than hardware wallets because they're connected to the internet and are susceptible to attacks.
Paper wallet
A paper wallet consists of a piece of paper on which you print your public and private keys. The public keys are often displayed as QR codes along with their respective alphanumeric string, and you can receive transactions by sharing the QR code or the string.
Some paper wallets also provide users the option to generate addresses in an offline ecosystem, ensuring that the key pairs are never exposed to any online activity.
People may opt to use paper wallets as an alternative to hardware wallets. The main drawback is that paper is easily damaged.
What can you do with a non-custodial wallet?
A self-custody crypto wallet allows you to interact with decentralized applications while you retain complete control over your funds. Here are a few ways you can use a non-custodial wallet.
Store funds
With a non-custodial wallet, you don't have to trust an external website to handle your funds. You can simply back up your seed phrase and private keys and recover your data and assets on your own. If you're using a multi-chain crypto wallet, you can even manage tokens across multiple blockchains.
Buy and sell crypto
Some non-custodial wallets allow you to purchase or sell crypto directly using a debit/credit card or bank transfer. On and off-ramp services like MoonPay make this possible.
Swap tokens
Non-custodial wallets allow you to swap tokens easily and securely. Most wallets also act as aggregators and provide prices from multiple crypto exchanges so you can exchange crypto at the most efficient exchange price and gas fee.
Send and receive crypto
With self-custody wallets, you can easily send or receive crypto from anywhere in the world and transfer your crypto assets across different wallets by importing and exporting your wallet keys.
Pay with crypto
Self-custody wallets offer multiple ways to pay with crypto. Apart from enabling you to send crypto directly to another user’s wallet, some wallets also allow you to buy gift cards with crypto, use a crypto debit or credit card, and even shop with merchants that accept crypto payments.
Are self-custody wallets secure?
Self-custody cryptocurrency wallets are secure as long as you take the necessary precautions to safeguard your assets.
Here are a few best practices you can follow to keep your wallet and its contents safe from hackers and scammers:
Use a strong password and lock your wallet when not in use. Most self-custody wallets have an auto-lock timer that will automatically lock the wallet after 24 hours. For additional security, you can modify the timer to a custom duration.
Don’t share your private key or seed phrase with anyone. Doing so will give others complete access and control over your wallet and funds.
Periodically review the dApps that can view your wallet's contents. Also, disconnect the ones you don’t use anymore.
Use your wallet through a secure internet connection. Refrain from connecting to public WiFi networks as they’re susceptible to cyber eavesdropping. Also called a “man-in-the-middle” attack, this is when an unauthorized entity inserts itself between you and the application you want to connect to so it can view or modify your data.
Be cautious when clicking links. They may lead to fake websites that gather details like your private keys, which can result in you losing your funds.
Add 2FA authentication to your wallet account's security settings. This will prevent a hacker from getting immediate access to your account.
Can a non-custodial wallet provider access my funds?
No. Self-custody wallet providers can’t access your funds. Only you have access.
Also, as long as you have backup and recovery mechanisms in place, you can access your funds even if the wallet service provider stops supporting the wallet or goes out of business.
How do I self-custody my crypto?
There are different types of self-custody wallets to choose from.
For the purpose of this article, we will show you how to self-custody your crypto using the most popular self-custody hot wallet.
Here’s a step-by-step guide to set up your MetaMask wallet:
1) Go to the official MetaMask website to download the wallet’s browser extension.
2) Choose Chrome and select Install. (You can also download the app for your Android or iOS device and follow the same process from Step 4).
3) On the Chrome extension page, select Add to Chrome to add the Metamask extension to your browser.
4) Once the extension (or app) is installed, open it, and select Get Started.
5) Read and agree to the terms and go to the next step.
6) Select Create a Wallet.
7) Create your password.
8) Securely store your secret recovery phrase (seed phrase).
9) Select each word of the recovery phrase in the same order as it was shown in the previous window and select Confirm.
10) Select All Done on the next screen to finish setting up your wallet.
11) Log into your existing crypto wallet and initiate an asset transfer to your new non-custodial wallet address. The steps you take here may vary depending on your custodial service.
Here are some step-by-step guides for how to send crypto
Closing Thoughts
Self-custody wallets ensure that no centralized intermediary or third party can control, confiscate, or censor your financial transactions.
But in exchange for this freedom, you are given complete responsibility for keeping your assets safe. It’s therefore crucial that you follow best practices to ensure the maximum security of your funds.
Start your crypto journey with MoonPay
Now you know the basics of non-custodial wallets, it’s time to explore them for yourself.
Non-custodial wallet providers like Metamask have partnered with MoonPay to make it easy to self-custody your crypto.
To get started, simply buy cryptocurrency via MoonPay using your credit card or any other preferred payment method.
MoonPay's widget offers a fast and easy way to buy Bitcoin, Ethereum, and more than 50 other cryptocurrencies.
MoonPay also makes it easy to sell crypto when you decide it's time to cash out. Simply enter the amount of the token you'd like to sell and enter the details where you want to receive your funds.
Still not sure how to start buying crypto? View our beginner's guide on how to buy Bitcoin.
