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What's a Self-Custody Wallet & Their Role in Web3

What's a Self-Custody Wallet & Their Role in Web3

You decided to buy cryptos; you want to invest in Web3 or start being part of this decentralized economy and the future of the internet. You even saw the token you want to invest in or thought about picking a Web3 diversified portfolio like ours.

You would only be missing one key element: a self-custody wallet.

But let's wait to get ahead of the facts. Before talking about self-custody and custodial wallets and their differences, let's go to the basics.

What is a crypto wallet

A cryptocurrency wallet is a device or service that stores users' public and private keys, allowing them to interact with various blockchains and send and receive crypto assets.

Wallets can be digital (software) or physical (hardware), hot (connected to the internet) or cold (disconnected from the internet), with custody (a third party has control of a user's private keys) or without custody (only the user controls their private keys).

They work in a similar way to your traditional wallet in which you store your credit card, which is the "key" to the money you have in the bank (or in the blockchain).

As you can see, there are several types of wallets, and each investor chooses the one that best suits their needs, but in this note, we are going to focus on two main types: non-custodial or self-custodial wallets and custodial wallets.

Do I trust myself, or do I trust others?

This is the question that needs to be answered when you are choosing whether you want a self-custody or a custodial wallet.

With a non-custodial wallet (or self-custodial, it's the same), only you have exclusive control of your private keys, which are the ones that give access to your cryptos and that prove that the funds are yours.

A third party controls your private keys with a custodial wallet, which is how most exchange wallets work. This means you trust the third party to protect your funds and return them if you want to exchange them or send them to another place.

Let's use the same traditional wallet example that we looked at earlier.

With a self-custody wallet you are the one who has it in your pocket, and only you know the pin of your bank and your credit card.

With a custodial wallet, a third party would walk beside you carrying your wallet in their pocket and knowing your card pin, and you would trust them to give it to you when you want to buy something.

In fact, there is a famous phrase in the crypto world that explains it better:

"Not your keys, not your coins"

We could translate this to: if you don't have the password and the wallet, they aren't your tokens.

Let's dig a little deeper into self-custody wallets

It's clear by now that self-custody wallets give investors complete control of their keys and, therefore, their funds.

Many large investors, or whales, prefer to use non-custodial wallets to store their significant investments and only leave a small percentage in custodial wallets to make quick exchanges.

Non-custodial wallets can be browser-based, as in the case of MetaMask or MagicWallet. They can be software installed on a computer or a cold wallet and come in hardware format, a piece similar to an external hard drive or pen drive.

While non-custodial wallets do not require you to trust a third party, they need you to trust yourself to keep your keys and wallet safe.

Being fatalistic, if you lose your wallet or forget your passwords, you will lose access to your funds, so you must keep your information in a safe place.

And just like with your bank account, protecting your keys and seed phrases and not sharing them with anyone to avoid hacks becomes more critical than ever.

Closing thoughts

The Web3 industry is already worth billions of dollars. It is expected to grow substantially by the decade's end as existing tech giants and startups rush to launch cutting-edge platforms.

How ​​can you interact with this industry? Through self-custody wallets.

They work like an account on the platform you want to use. Just as the more traditional tech industry uses Facebook and Google logins, DeFi and Web3 use a self-custody wallet.

And not only do they allow you to interact with credit and lending protocols or on decentralized exchanges, but they also allow you to store NFTs, participate in metaverses, and be part of the blockchain gaming platforms that have gained popularity.

Beyond that, they give you absolute and total control of your funds and your presence and eliminate the need to trust third parties to store them and guard your data.