Does the Custodianship of Your NFTs Matter?

Apr 21, 2022
3 min read

The growth of the Defi ecosystem has been possible because of how popular NFTs grew. Holding or trading of NFTs and other crypto assets has become effectively standard in recent times. In all this hype about NFTs and Defi, the custodial and non-custodial NFT discussion has grown significantly in consideration of the massive scale adaptation of NFTs.

Until recently, there was very little to no chatter about the custodianship of your NFTs, so why now? Well, the answer is quite simple, it is to know who controls your NFTs and crypto-assets. Before we dive deep into understanding the differences, let's understand how your crypto wallets and the custodianship of your crypto assets are linked.

Importance of Crypto Wallets for Custodianship

A crypto wallet, like any other wallet, is used as a store of value. You can use the wallet to make transactions on decentralized applications. There are two main aspects of a wallet, the private key, and a public key.

A public key is used to generate an address for the parties involved in the transaction to send and receive cryptocurrency. The private key is something like a password that is used for authentic transactions when a sender wants to send cryptocurrency or NFTs.

Custodian services are where the private key of your wallet is held with someone else. The extent of authority is decided by you, the owner of the wallet. You can grant them complete custody or partial custody and their right depending on how you see fit. Non-custodian services are where you hold the private key, and you have all the authority in regards to how you want to utilize the crypto assets you own.

Custodian vs. Non-custodian NFTs

Let's talk about the difference between the two from various views.

  • Definition: The definition of the two is a basic fundamental aspect of comparison as NFTs stored in a custodial wallet are custodial NFTs, and the ones stored in the non-custodial wallets are non-custodial NFTs.

    In the case of a custodial NFT, you need to authorize the service provider (a third-party custodian) to control your NFTs. Whereas in the case of non-custodial NFTs, you enjoy the complete authority of your NFTs.
  • Purchasing of NFTs: In the case of custodial NFTs, your purchasing power depends based on the control you have over your NFTs. You can purchase custodial NFTs from marketplaces that manage your private keys.

    The best way to purchase Non-custodial NFTs is by purchasing them from a decentralized platform.
  • Convenience: Custodial NFT holders must register their accounts and complete their KYC verification with the exchange.

    Non-custodian holders don't need an account, and since there is no account, they don't have to get themselves verified.
  • Transaction cost: Custodian NFTs have higher transaction costs since the custodian's involvement. Non-custodian NFTs have minimal transaction costs as they are directly linked to your wallets.
  • Security: Security is a prominent point of difference when it comes to the comparison of custodial and non-custodial NFTs. The custodial NFTs always depend on how secure the custodian's infrastructure is since the service provider holds the private keys. Non-custodian NFTs are different as it uses personalized security methods that can be better and improved with time.
  • Support: Custodial NFTs have the support system provided by the service provider. They come equipped with a standard measure to help you in case you lose your private keys. Non-custodial NFTs have limited support as if you lose your private key, there are fewer measures to retrieve it.

Which Is Better: Custodian NFTs or Non-Custodian NFTs?

After analyzing the key points of difference, it is evident that custodian and non-custodian NFTs are customized for the users. There are pros and cons to using both.

Custodian NFTs offer a better support system in case you misplace your private key, but the downside is that you'll have to follow the procedure for the creation of an account, pay higher transaction charges, have limited purchase power, and abide by available security standards.

Non-custodian NFTs have a better edge when it comes to lower transaction costs, no restriction on purchasing power, and ease of transaction. With non-custodian NFTs, you will need to be careful when it comes to the selection of security standards and private keys.