In order to utilize blockchain technology, you will need a Web3 wallet, which will act as the gateway for your cryptos, non-fungible tokens (NFTs), decentralized finance (Defi), and other decentralized applications (Dapps).
How do web3 developers benefit from wallets?
Sending and receiving information on a decentralized network is necessary for programmatic interaction. Crypto wallets make this possible. As developers, you need them to deploy any services on a distributed ledger, such as smart contracts or Hedera's API, even though they are primarily used for storing cryptocurrency. Distributed ledgers can be read by anyone, but they cannot be transacted without a wallet. Wallets serve as anonymous identifiers. In some web3 developer communities, anonymity is taken seriously, and developers are known by their public keys. This is why the phrase "see you on-chain" was coined.
What is a Custodial Wallet?
Custodial wallet services are provided by platforms or firms that have total access to the accounts. These accounts can be controlled by them using their private keys. Clients are never given access to their private keys by the firm. The wallets are then created, and the private keys are often controlled by the wallet provider rather than shared with the user.
What is a non-custodial wallet?
In a non-custodial wallet, you will have complete control over your assets, since you own the private keys. In order to move your cryptocurrency out of your Web3 wallet, you need a private key. You can deposit cryptocurrencies into a web3 wallet using the public address, but moving them out requires the private key.
The good news is that your Web3 wallet can be recovered if you forget your password. Your seed phrase, which consists of 12-24 random words that you must never share, is needed to retrieve a Web3 wallet. Anyone with access to your seed phrase will now have complete control over your funds and can withdraw your cryptos.
You can restore your original Web3 wallet using your seed phrase. You will lose access to your Web3 wallets if your laptop breaks, but if you keep your seed phrase safe, you can still access them. Your original seed phrase can be used to restore your web3 wallet on your new laptop to gain access to your account.
A non-custodial wallet can be classified into three types:
Hardware wallets: These devices connect directly to your web3 wallet and do not require an internet connection. I.E. Ledger and Trezor.
Web-based wallets: Web-based wallets act as extensions to MetaMask and TrustWallet.
Mobile-based wallets: Similar to web-based wallets, these mobile wallets use your password or fingerprint for authentication.
Advantages of a Non-Custodial Wallet
One of the benefits of non-custodial wallets is their security. Money is totally under the control of users when using a non-custodial wallet. Wallet owners possess the wallet's private keys.
A non-custodial wallet is theoretically the most secure. Decentralized finance (Defi) uses non-custodial wallets extensively since they are required to engage with decentralized apps (dApps). Because of this, non-custodial wallets can integrate with most decentralized apps (dApps) and permissionless financial protocols. Non-custodial hardware wallets enable offline transactions, so you don't need an internet connection to access your account. Consequently, there is no need to worry about online theft for the user.
Unlike custodial wallets, non-custodial wallets do not require KYC or AML information from their users. Clients do not have to undergo time-consuming and rigorous processes to access their wallet savings.
If a cryptocurrency investor has a non-custodial wallet, he is free to trade at any time. Due to the absence of a middleman or centralized authority to authorize transactions, transactions in non-custodial wallets are faster. Transactions can usually be completed within seconds on most blockchains.
Disadvantages of a Non-Custodial Wallet
Although non-custodial wallets are recognized for their security, if a computer is infected with a virus or spyware, it can be hacked.
Therefore, the security of the client's wallet may be compromised. It is imperative that a user ensures that his computer has proper anti-virus software installed. Using non-custodial wallets is difficult, but if they can be set up easily, they can be used instantly. If a client forgets their seed phrase, they lose all of their investments and funds. In this situation, there is no hope of recovery. To avoid this problem, one must keep their seed phrase safe.