ZacharyZachary
21 October 2021
Oct 2021
19 min

What are Non-Custodial Wallets?

Crypto wallets come in all sorts of shapes and sizes. 

Non-custodial wallets give you and only you the control over your private keys. A private key is a secret code that your wallet uses to verify cryptocurrency transactions you send from your wallet. These keys are governed by mathematical functions that prove the funds are yours and no one else has access to or can recover them. 

When you open and fund an account on a centralized exchange you’re creating a custodial wallet and trusting that the exchange will grant you access to your funds as they are in custody of your keys. As we’ve seen time and again – with even the biggest, most regulated centralized exchanges (Coinbase, Binance, Gemini, Voyager, Robinhood) – when the volatility picks up, users are often unable to place any trades. 

Storing funds on an exchange can also be hazardous because exchange wallets have massive amounts of tokens under their custody. They become targets for bad actors. Mt. Gox and Quadriga are two notorious examples of avoidable exchange hacks. In each case, most of the users with exchange wallets lost their funds.

These events, among others, are where the phrase, ‘not your keys, not your coins’ comes from.

This is destabilizing to the entire centralized crypto ecosystem and legacy financial system because users lose trust in the intermediaries they have to deal with, and trust is the backbone of centralized finance. Cue, decentralized finance (DeFi) and permissionless systems. 

Non-custodial wallets give you and only you the control over your private keys. These keys are governed by mathematical functions that prove the funds are yours and no one else has access to or can recover them. 

Rather than trust the exchange to grant you access to your own property, you can simply self-custody your tokens in a non-custodial digital wallet, like Solflare. With self-custody, you are relying on the security enabled by the modern cryptography that makes your digital wallet possible, rather than a third party exchange or custodian.

With great power comes great responsibility. 

The primary risk to self custody is losing your login information which would make your digital assets unrecoverable. You’re able to change your password with your mnemonic phrase but if you forget your mnemonic phrase and your password, you won’t be able to login again. Being organized early on can save you millions.

This is why it’s imperative to store your wallet passwords and mnemonic phrases in secure, recoverable locations. The best practices are to physically write them down and also store them in encrypted documents on a device of yours – not a cloud-based storage system that can be hacked.

There is estimated to be well over 3 million Bitcoins that are unrecoverable – about 20% of the current supply equating to over $200 billion at current prices. This number may be inflated as it could be representing long term hodlers, but many suspect the majority of these dormant funds to be lost forever. Only time will tell exactly how many Bitcoins have been lost or forgotten.

While all of this is unfortunate, it’s clear that the benefits of self custody greatly outweigh the self-imposed risk of forgetting a password and/ or mnemonic phrase. For the first time in history, you can be entirely in control of your own finances and participate in global peer to peer transactions at any hour of the day without permission from a centralized intermediary.

Remittances

The easiest argument for self-custody is found in the remittance industry. This is also an argument for crypto as a whole but it wouldn’t be possible without non-custodial wallets.

Studies have shown that migrant workers in first world countries spend up to a full month’s worth of wages to send remittances back home to their families. 

Low and middle income country remittances amounted to $466 billion in 2017. Globally, fees averaged 7.45%, or $34.7 billion. 7.45% equates to over 27 days of a worker’s annual income. To put the absolute dollar value of these fees into perspective, the US’s non-military foreign aid budget was $34 billion in 2017. Crypto fixes this. 

Inflation-adjusted sum of country-specific remittance flows. Source: World Bank.

Through the use of non-custodial wallets, users have the ability to seamlessly send capital over decentralized networks while paying next to no fees – as long as they’re not using Ethereum. 

Transacting over Solana is frictionless and typically costs 0.000005 SOL, or about $0.001 in transaction fees. Solana and other low-fee blockchains can dismantle the Remittance Service Provider (RSP) industry which is heavily reliant on banks, who in 2017 charged an average of 11.18% in remittance fees. 

Conclusion

Non-custodial wallets like Solflare enable a level of freedom that has not existed before. You are always the one in control of your capital while it’s in your wallet. 

You can transact with any other wallet at any time in any compatible cryptocurrency without permission. You also have instantaneous access to the wonderful world of DeFi where you can pseudonymously participate in cutting edge financial services as well as NFT and DAO platforms that you otherwise would not have access to. 

In the same way that bank accounts became safer than holding cash, self-custodying crypto is safer than using a bank – when done correctly. Store those passwords and mnemonic phrases in secure places. 

Solflare is the most powerful non-custodial wallet on Solana. You can swap and stake your tokens directly within the web app and browser extension, and you’ll soon be able to directly invest in managed funds through the wallet on the ground-breaking Solrise investment platform. 

Here’s How to Get Started with Solfare.

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