A custodial wallet refers to a type of cryptocurrency wallet where a third party, typically a service provider like a virtual asset service provider (VASP), or financial institution, holds and manages the private keys of the wallet on behalf of the user. Private keys are essential for accessing and managing one's digital assets.
A non-custodial wallet (self-hosted wallet) is the opposite. The wallet owner has access to the key.
The custodian, or the service provider, is responsible for generating and safeguarding the private keys associated with the wallet. Users do not have direct control over their private keys. Since the custodian holds the private keys, users rely on the custodial service's security practices. If the custodian's security is compromised or if they act maliciously, there is a risk of loss of funds.
Users interact with their crypto assets through accounts provided by the custodian. They may use a username, password, or other authentication methods to access and manage their funds.
Examples of custodial wallets include wallets provided by cryptocurrency exchanges, online wallet services, and certain mobile wallet apps.