What is Non-Custodial?

Non-custodial is a service that does not require a third party to hold custody over the assets of a customer during the duration of a transaction or other financial services. The process occurs by using trustless smart contracts. They are blockchain-based self-executing programs without a central authority.

While custodial services require a centralized figure to possess the assets of a customer for safekeeping or management, non-custodial services are decentralized as they do not rely on any intermediaries. Non-custodial services are preferred in the crypto industry due to lower risks and a higher level of decentralization.

Custodial services pose numerous risks, such as censorship, confiscation, or increased processing time. Some examples of custodial services are centralized exchange platforms (CEXs) such as Coinbase and Binance, digital asset management services like PayPal, or fiat-backed stablecoins, such as Tether (USDT) or the USD Coin (USDC).

Non-custodial services are trustless, meaning that they do not rely on any centralized authorities. Furthermore, they are censorship-resistant, cannot be confiscated, offer faster processing times, and do not pose the risk of insolvency or downtime. Decentralized services are considered to be less complex to use than custodial services.

Decentralized exchange platforms (DEXs) like Uniswap or Binance Dex, are the prime examples of non-custodial services. Algorithmic stablecoins like Dai (DAI) and Ampleforth (AMPL), digital asset management services such as Genesis Vision, and lending/borrowing services like Compound also act as non-custodial.

Customers can find non-custodial wallet solutions, which allow them to maintain full ownership over their crypto assets by holding both their private keys and recovery seeds. This includes both hot wallets like TrustWallet, and hardware wallets such as Ledger or Trezor.

Custodial services provide customers with reliable recovery and security, as centralized services insure the assets in the event of theft or other malicious activities. Using non-custodial services may be riskier as some bugs or errors within the smart contracts may be used as exploits for theft. 

Furthermore, if the customer of a non-custodial service loses their access to the account, they may be unable to recover the funds. Custodial assets are easier to recover due to the identification methods available.

Anti-money laundering (AML) regulations like the FATF Travel Rule directly affect custodial cryptocurrency services. This push toward regulation has piqued users’ interest in non-custodial solutions which offer anonymity.