Custodial vs non-custodial NFTs: Key differences

Understanding NTFs

Nonfungible tokens, or NFTs, are blockchain-based cryptographic assets that represent one-of-a-kind, uncommon items.

Regular blockchain tokens are almost like tangible money, such as Bitcoin (BTC) or Ethereum (ETH), in terms of uniqueness, and are fungible — that is, they can be sold or exchanged. In contrast to BTC and ETH,

Each NFT is distinguished from the others by specific metadata and a unique identification code. The rarity of NFTs causes scarcity in the crypto market, resulting in high demand and skyrocketing prices.

Artworks, melodies, video clips, in-game collectibles, sports cards, and even fashion products and real estate are all represented by NFTs. These products can be simply tokenized with NFTs to establish digital ownership certificates that may be bought, traded, and sold. NFTs can possibly be sold to a large audience without the requirement of a middleman thanks to the usage of smart contracts and blockchain technology.

Cryptocurrency wallet

A cryptocurrency wallet is a secure storage location for digital assets such as NFTs.

Any blockchain system would be incomplete without a bitcoin wallet. Users can use crypto wallets to sign transactions, manage balances, leverage blockchain services, and access NFT marketplaces. Many NFT platforms no longer need to keep users’ account details thanks to crypto wallets, making transaction processing safer and more accurate. There are two types of crypto wallets for NFT’s that are described below:

Custodial Wallet

A custodial NFT wallet is one in which the private key is accessible to a third party — a crypto custodian — who safeguards the key to keep the assets safe.

Have you ever been curious about custodial crypto?

Keeping NFT custody or allowing someone else to do so is both valid alternatives here, depending on how much responsibility users wish to assume regarding the custody and control of their NFTs.

Custodial or non-custodial NFT wallets are available. Some wallets let users to access their funds but do not hold keys. Other wallets provide users complete control over and access to their NFTs, including the secret key.

A third party keeps all sensitive data and assets for a user, including the wallet’s private key, in a custodial crypto wallet. An NFT marketplace, an exchange, or a custodial wallet provider could be this third party.

Custody wallets are widely regarded as the most user-friendly and straightforward to set up. Furthermore, users are relieved of the responsibility of remembering and securing their private keys, as this is handled by a third party. By obtaining information from a third source, they can easily restore accounts.

The most significant disadvantage of utilizing a custodial wallet is a loss of autonomy and anonymity, as users are frequently advised to complete Know Your Customer (KYC) requirements, which require users to authenticate their identity using personal papers such as a passport or driver’s license.

Non-custodial Wallet

By storing the private key, a non-custodial cryptocurrency wallet gives the wallet owner entire control over the security of the crypto assets.

A user with a non-custodial NFT wallet has complete control over their funds and activities. A private key, in particular, is kept by the user and is not available to third parties. As a result, wallet owners are solely responsible for saving and protecting passwords, also known as mnemonic phrases. If a user forgets or loses their password, they will lose access to their wallet forever.

The key benefit of a non-custodial wallet is that the user has complete control over it and may pick between the default transaction charge and a higher fee depending on how quickly they want a transaction to occur.

The primary disadvantage is the risk of losing funds indefinitely if users forget or lose the backup mnemonic phrase. Non-custodial wallets are also less user-friendly for those unfamiliar with cryptocurrency.

Users can store their NFTs in both custodial and non-custodial wallets; all they need to do is make sure their wallet supports the relevant NFT standard. ERC-721 and ERC-1155 are the most common Ethereum blockchain standards, while BEP-721 and BEP-1155 are the most used BSC blockchain standards. The type of NFT determines whether it is custodial or non-custodial.

NFTs can be produced using both the 721 and 1155 nonfungible token specifications. The ERC/BEP-721 NFT standard intends to generate tokens that are interchangeable. Each ERC/BEP-721 coin is one-of-a-kind and represents a single asset. ERC/BEP-1155 is a better standard than ERC/BEP-721 since it allows for the development of both fungible and nonfungible tokens. This standard is also less expensive because it eliminates the need for gas, giving it a more economical and approachable option to create an NFT.

When holding NFTs in a custodial or non-custodial wallet, users should first check the NFT token standard and ensure that their wallet supports both the blockchain and the NFT token standard.