What Is Non-Custodial?
Non-custodial refers to a type of service where funds or assets are not held or controlled by a platform or third party at any point during a transaction or service period.
Instead, the entire process, often involving economic activities, is conducted through trustless smart contracts.
These smart contracts are complex self-executing code that operate on blockchain networks.
Non-custodial services exemplify decentralization and eliminate the need for intermediaries, making them favored by cryptocurrency enthusiasts due to reduced risks.
A Comparison of Risks and Benefits
Custodial services, in contrast, involve the custody and control of user funds or assets by a centralized entity.
This type of service carries risks such as censorship, confiscation, downtime, insolvency, extended processing times, complexity, and counterparty risk.
On the other hand, non-custodial services are trustless, resistant to censorship, generally faster, less complex, not subject to confiscation or insolvency, and have minimal downtime.
They exemplify the core principles of decentralization.
Balancing Recovery and Security
It is worth noting that custodial services currently offer advantages in terms of recovery and security, often providing better assistance in case of theft or malicious activity and being insured.
Non-custodial services carry smart contract risk, where vulnerable or flawed code could be exploited for fund theft.
Additionally, if users lose their private keys or account access, they may have limited options for fund retrieval.
Custodial services have more recovery options available through identification methods since they control access to users’ funds.
The increasing implementation of anti-money laundering (AML) regulations, such as the FATF Travel Rule targeting custodial crypto service providers, is driving some users towards non-custodial solutions, as they offer a level of anonymity, at least for the time being.