Cryptocurrency is digital money that uses blockchain technology to secure and record transactions. One of the main components of owning and managing cryptos is using a wallet. A wallet is a place where you can store your cryptocurrency.
There are two main types of wallets: traditional wallets and self-custody wallets. In this article, we will explain the critical differences between traditional and self-custody wallets, the advantages and disadvantages of each, and help you understand the concept of "not your keys, not your coins." This phrase refers to the idea that to own and control your crypto, you must possess your private keys.
A traditional wallet is like a bank account. A company holds your crypto for you and makes sure it is safe. You can withdraw your crypto whenever you want, and the company will give it to you. But the company is in charge of keeping your crypto safe, so your crypto might be lost or stolen if they make a mistake.
A self-custody wallet is like keeping your crypto in a piggy bank at home. You are in charge of keeping your crypto safe. You have to ensure that no one else can take your piggy bank and that you don't lose its keys. It's your responsibility to keep your piggy bank safe. But if you do a good job, you will control your assets in the piggy bank.
The main difference between traditional and self-custody wallets is who is responsible for keeping the crypto safe. With a traditional wallet, the company is responsible. With a self-custody wallet, you are responsible.
Self-custody wallets are usually hardware wallets, also known as cold wallets. These wallets are physical devices that store your private keys offline and provide an extra layer of security. Hardware wallets are not connected to the internet and are less vulnerable to hacking or cyber-attacks. Public keys are like your bank account numbers which can be shared publicly. Private keys are like your online banking passwords, which must never be shared. With hardware wallets, you completely control your private keys and have the sole responsibility for protecting your assets. Thus, not your keys, not your crypto, is one of the core tenets of crypto.
On the other hand, traditional wallets by crypto exchanges are online platforms that allow you to buy, sell, and store your crypto. These exchanges hold your private keys on your behalf and are, therefore, responsible for the security of your assets. They offer a degree of convenience and accessibility but come with risks.
In summary, traditional wallets and self-custody wallets differ in who is responsible for keeping the crypto coins safe. Traditional wallets are held by a company and are therefore safer, but you have less control. Self-custody wallets give you more control over your cryptocurrency, but keeping it safe is on you. Self-custody wallets are considered more secure but require more technical knowledge to use, while traditional wallets are considered to be more convenient to use but less secure.
(The author is the Vice President of crypto investment platform WazirX)
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