Everything You Need to Know About Custody Wallet Services for Digital Assets
The term “custodian” has been around since the 1960s. It is extensively used in the traditional financial system to reflect the role and responsibility of the bank in the economy. Custodian is also a widely used term in the crypto space to address custody wallet service providers. The following section discusses what custody wallet services are and other associated terms.
What is a crypto custody wallet?
A custodial wallet is referred to a wallet in which a third-party service provider holds the investor’s private keys. The third-party custodial digital asset management platform has absolute control over funds. To send or receive funds, investors just need to provide permission to the cryptocurrency wallet to move forward with the transaction. Custodians don’t store the actual assets – as all the asset-related information is already present on the blockchain. It just holds the private keys that provide access to all the assets.
Components of Custody Wallet
Private keys
Private keys constitute a large combination of randomly generated numbers that help determine and prove the ownership of crypto assets. The private keys play a critical role in transferring assets across blockchain ecosystems. Investors who employ digital asset management platforms such as Custody Wallets to initiate transactions need to verify each transaction by digitally signing it with their unique private keys first. The private keys are not designed to be shared with other parties – it is supposed to be confidential. The person who gets access to private keys is legally in possession of the digital assets owned by the investor and stored in the digital asset management platform.
Public keys
The public key constitutes a large combination of numeric characters, which are extensively employed while conducting transactions across the blockchain. The public keys are designed to share with other people within your network to transact assets. Cryptocurrency wallets use the public key to promptly generates a deposit address. The deposit address generated by the respective digital asset management platform help determines where the partners need to transfer the asset.
Upsides of cryptocurrency wallet.
Architectural Simplicity
Many investors prefer custody wallet because it is simple to use and provides a convenient user experience. Custodial digital asset management platform tracks and maintains private keys for investors so that investors don’t have to worry about the management of private keys. As a new type of digital asset comes into the market, custodial digital asset management will play an even more critical role in the blockchain ecosystem.
Experts often recommend custody wallets for retail traders who prefer executing frequent on-chain transactions as well as for managing complex digital asset holdings.
Operational Efficiency
The simplistic architectural design of Custody Wallets help achieves operational efficiency. The convenience offered by the digital wallet (i.e. custodial wallet) allows investors and traders to save time and effort while inheriting security risks. It makes portfolio management easy for stakeholders. The ease of use comes with a trade-off.
Improved Security
From a security perspective, custodial wallets are not the best digital wallet that most investors could opt for. They are not shipped with inbuilt security features. Most cryptocurrency wallet service providers have the resources, technology, and experience to deliver highly secured products or solutions.
Reduced Risk
Apart from top-notch security features, the digital wallet offers numerous other ways of protecting your fund and reducing risk. Several digital asset management platforms are offered licenses from the government authorities (regional) – enabling the service provider to act as a digital asset custodian. The licensed cryptocurrency wallet service providers are mandatorily required to safeguard investors holding, especially against theft, loss, cyber-attack, and unauthorized access. Numerous custody Wallet services providers offer insurance to cover investors’ assets – in case of potential loss due to unforeseen circumstances.
How does the crypto Custody Wallet function?
In a nutshell, the crypto custody wallet securely stores crypto investors’ private keys – enabling them to initiate transactions anytime from anywhere without hassle. The private keys held by custodial cryptocurrency wallets help prove that the respective investor owns the assets and funds. When compared to the traditional financial system, the custodians for individuals are financial institutions such as banks, mandatorily required by government authorities and regulators.
Self-Custody Wallet
The self-custody wallet allows users to have complete control over their funds and hold the private keys of their wallets. Investors employing custodial cryptocurrency wallets hold their private keys, which help prove ownership of their funds parallelly, allowing them to access funds without friction. With a self-custody cryptocurrency wallet, investors have completed control over their assets which means they bear all the associated risk. If an investor loses the private keys, then there is no other alternative method of retrieving the investor’s funds from the cryptocurrency wallet or the cold wallet. Losing the private key is equivalent to losing a crypto asset forever.
Third-party Custody Wallet
Often, users find it challenging to deal with blockchain technology, such as wallets and exchanges. The third-party custodial cryptocurrency wallet makes interaction with blockchain technology convenient and easy for clients.
The third-party digital asset management platform securely holds investors’ private keys. Employing a custodial crypto wallet is equivalent to holding your fund in a checking account with a bank. Prior to using a custodial cryptocurrency wallet, the user needs to undergo know-your-customer and anti-money laundering checks.