How do crypto wallets (public and private keys) work?
The most important thing to know is that every wallet comprises a set of what are called “public” and “private” keys. The public key is like the number for your bank account. It’s what you give to people so they can send you crypto. To be more specific, the public key is a very long string of letters and numbers. So, to make things easier, crypto wallets shorten the public key and give you a public address that other people can use to send you crypto assets.
Your private key, on the other hand, is like your password. It’s what you use to get to your money and spend it. Scammers are always using phishing, emails, fake websites, and other tricks to try to get users’ private keys. Because of this, you should be very careful and never give anyone your private key, which gives them full access to your funds.
What Does a Custodial Wallet Do?
A custodial wallet is one where the private keys are managed by a third party, usually a cryptocurrency exchange like Coinbase or Crypto.com. You can buy and store cryptocurrency without having to worry about managing or losing the private key. Custodial wallets work like banks and other places that handle money. They know your private key and keep your crypto assets safe for you. So, they can get to all of your money and act as a middleman between you and other wallets. You can open a custodial account the same way you open a bank account: by showing your ID card and bank statements.
What Is a Crypto Wallet That Doesn’t Hold My Coins?
With non-custodial cryptocurrency wallets, your private key is the only way to prove that your cryptocurrency belongs to you. Instead, you use your identification documents to do this with a custodial wallet. Custodial wallets are easy to use, and you don’t have to worry much about where the private keys are kept. But if their database gets hacked, you will lose all of your money for good. This has happened a lot of times before.
Most of the time, a private key is a long string of hundreds of letters and numbers that are hard to remember. But many crypto wallets simplify them into about a dozen words that have nothing to do with each other and must be written in the right order. So, when you download a noncustodial wallet, it will give you a list of 12 to 24 words like this one. This list is called a “seed phrase,” and your private key will be linked to it by the wallet.
Let’s say you lost your phone, which was where you kept your crypto. You can get your wallet back if you reinstall the app and enter your seed phrase. Most of the time, this is the only way to get your wallet back if you lose it.
Because of this, you should never lose your seed phrase. You can either learn it by heart or write it down and put the paper away somewhere safe. If you forget it, you might never be able to get your money again.
What’s Different About Custodial Wallets and Non-Custodial Wallets?
The private key is the most important and most important part of the difference. When people argue about which wallet is better, private key storage is almost always at the center of the most heated arguments. Custodial wallets keep your private key and take care of it for you. So, they have full access to your money and act as a middleman between you and other wallets in the Commonwealth. A bank or other trusted institution is a good analogy for a custodial wallet.
This is different from wallets where you have to store your own private key. You can either remember this or write it down. But these two choices are risky because if you forget your seed phrase or someone steals it, your money is gone forever. The second difference is that transactions in custodial wallets don’t happen on-chain, but rather off-chain. To put it simply, if you use a crypto exchange to sell some bitcoin and buy some Ethereum, that transaction won’t show up on a blockchain network.
Instead, the crypto exchange will just update its database to reflect the fact that you now own different amounts of crypto. So the transactions don’t happen on the blockchain; they happen internally. On the other hand, transactions made with crypto wallets that don’t keep your money are always made directly on the chain. This means that when you make a transaction, it gets recorded on the blockchain. The third difference has to do with backing up and restoring the wallet.
Like a bank account, they can help you get back into your account by looking at your ID to make sure you are the real owner. With a non-custodial wallet, on the other hand, it is up to you to back up and recover your own funds. To do this, you can keep your seed phrase in a safe place. If you lose your private key, you can’t call customer service to help you get your money back.
The KYC is the fourth difference. KYC stands for “Know Your Customer,” which is a rule that says financial institutions must check the identities of their users and do other checks. In simple terms, it is the process of going through your ID documents and making sure that you are whom you say you are. KYC compliance is needed for custodial wallets. This means that when you sign up for a custodial wallet, you will usually need to show some kind of ID, like your driver’s license or passport.
This can be a problem because they usually take up to 72 hours to be verified. So this is a pretty long and tedious process, and you’ll have to wait until it’s done before you can use the service. KYC compliance doesn’t apply to noncustodial wallets, so you don’t have to give any personal information when you set up the wallet.
If you want to keep your crypto safe, you should get a wallet that doesn’t hold your crypto for you. Custodial wallets and crypto exchanges are good places to start because they are usually easier to use and have ways to get back into your account if you lose it. On the other hand, this comes with a huge trade-off: custodial wallets don’t give you full ownership of your crypto, which goes against the whole point of cryptocurrency and blockchain technology. In fact, “not your keys, not your crypto” isn’t just a catchy slogan. If you don’t control your private key, you don’t control your crypto assets.
And crypto exchanges own your cryptocurrency, so they can do whatever they want with it.
Custodial Wallets: Hacked, Stolen, and Fraudulent
Let’s look at what’s been going on with Celsius lately. They stopped people from withdrawing money from their platform, which means millions of people can’t get to their hard-earned cash and might lose it forever. That’s not all, though. If you give a central exchange control of your keys, there is a chance that they will be lost because of corrupt practices.
Which wallet that doesn’t hold your money should you choose?
But you should know that not all self-custody wallets are the same and that there is a new generation of wallets that solve this problem. Smart wallets are a new type of non-custodial wallet. They have all the benefits of non-custodial wallets and also let you back up and recover your wallet without worrying about a seed phrase. This is why we at linen decided to build this type of wallet.
So how can smart wallets like Linen be so safe and easy to use and find?
First of all, a linen wallet is protected by three keys instead of just one, like most non-custodial wallets. You need two out of three keys to make a transaction, so even if you lose or someone steals one key, you still have access to your money. Other non-custodial wallets only have one key, and if you lose it or someone else gets access to it, you lose all of your money forever. One of the main problems with other non-custodial wallets is that you have to keep your private key on a piece of paper or a metal card. This makes it very easy to lose. Instead, a linen wallet makes it easy to keep track of your private keys. One key is kept in the cloud, one is on your phone, and one is in the secure server infrastructure of linen. so that you can easily find your wallet using your email address and phone number from Cloud Drive.