Non-Custodial Wallets Enable Private, P2P Crypto Trading [2024]

Non-custodial exchanges can be harder to use compared to custodial exchanges because the control of your private keys to you wallet are not outsourced to a third-party specialist. But non-custodial exchanges enable users to conduct private, P2P crypto trades (including trades on coins that are not listed on custodial crypto exchanges), reduce 3rd party risk and keep cryptos decentralized. To use non-custodial exchanges, users need to rely on non-custodial wallets.

In this article, we will delve more into the mentioned benefits so you can decide which alternative works better according to your specific investment needs. But before that, we will provide a brief explanation on P2P transactions and custodial vs. non-custodial wallets.

What is a P2P transaction?

P2P transactions are transactions of cryptocurrencies between two peers, with no central body being in charge of controlling the exchange.

How were digital P2P transactions born?

Internet was the ancestor of peer-to-peer sharing. P2P music or file sharing networks like Napster initially gained significant traction, but later got into legal troubles due to copyright issues.

Today, they are replaced by BitTorrent trackers operating in various jurisdictions, despite their activities being restricted by mounting legal regimes.

P2P sharing is again a hot topic, but this time it’s affecting one of the most important human inventions: money. Blockchain technologies allow people to make decentralized transactions with cryptocurrencies.

Similarly, as we explain below, we believe that these transactions are also on their way to end up being not 100% decentralized, just like the internet.

How are transactions made in the crypto world today?

A user needs to have a wallet in order to send or receive any type of cryptocurrency. The user either:

• Allows an exchange custody of their wallet enabling the exchange to transact on behalf of the user. This is called a custodial exchange
• Or does not allow an exchange custody of his/her wallet and completes transactions themself. This is achieved via a non-custodial wallet/exchange.

What is a custodial exchange/wallet?

Today, most users use custodial exchange platforms such as Binance, Kraken or Coinbase. The platform is in charge of keeping the wallets and keys secure.

Advantages

• Easy-to-use User Interface (UI)
• Various complex trading options and features including:
  • Staking your cryptos in a savings account and earn interest
  • Gambling (e.g. by betting on the short term increase or decrease of a parity)

Disadvantages

• 3rd party risk: The exchange could fail or execute wrong or fraudulent transactions. Both of these events have taken place in crypto exchanges as well as other systems of custody, such as banking.
• Lack of anonymity due to 3rd party risk: All users should have a verified account in order to partake in exchanges, thus removing anonymity.
• Limited coins: Because these exchange platforms gain commission on exchanges made with the coins that they are in partnership with, the investment opportunity for the users are limited to only those.

Feel free to read more on custodial crypto exchanges.

What is a non-custodial exchange/wallet?

A non-custodial exchange platform is a crypto exchange platform where custody of their wallet is 100% in user’s control.

People who have their own wallets have full control over their cryptocurrencies, passwords and keys, where no central body keeps their passwords, keys or coins. Non-custodial exchanges can have various forms such as mobile apps, desktop applications or browser extensions.

Non-custodial wallets can be easily connected from non-custodial exchange platforms by just clicking a simple “connect” button.

Advantages

• Anonymity: There is no KYC process so users have anonymity as long as they don’t associate their wallet with their identity
• Reduced 3rd party risk: Users are in control with no other party having custody of the coins. However, the provider of the wallet is a source of risk since they could have embedded malicious code in the app.
  • Open source wallets mitigate that risk thanks to a large group of users checking the integrity of the code. However, open source is also not vulnerability free as we have seen many times.
• P2P transactions: Users can participate in ICOs or purchase unlisted coins or participate in platforms with lottery as well as interest-bearing capabilities such as uniswap or pancakeswap.

Disadvantages

Can you imagine having millions of crypto investments (most of your personal worth) and then forgetting the password of your wallet? It’s happened to many. Using custodial exchange platforms decreases the risk of losing your wallet as you can always get in touch with your exchange platform to recover your password.

What types of non-custodial wallets exist?

Different types of crypto wallets can be connected from non-custodial exchange platforms. Wallets can be categorized into 3 segments:

Hardware Wallets

A physical device that can store information up to its disk size. Traditional log-in using username and password is required to access these wallets.

Web-Based Wallets

These can be accessed from any device that has internet access with a private key login. Browser extensions like Metamask, Brave Wallet and Binance Smart Chain are some of the web-based non-custodial exchange platforms.

Mobile Wallets

Wallet Connect is one of the non-custodial exchanges where users can create a wallet instantly and transfer money to other wallets by just scanning a QR-Code.

How do non-custodial exchanges keep the crypto world decentralized?

Crypto trading, like the internet, has mostly moved from P2P model to a centralized model where most users have accounts in custodial exchanges like Binance, Coinbase or Kraken.

With more revenues, these exchanges launch improved features and invest in marketing to further grow their businesses. So there is a feedback loop at work which minimizes the decentralized nature of crypto trading. Non-custodial wallets are one way to keep crypto trading decentralized.

Which one should you choose, custodial or non-custodial exchanges?

Custodial exchanges are easy-to-use and feature rich but they have more 3rd party risk. If these features are appealing to you, you can continue to use or identify the best custodial-exchange for you.

On the other hand, if you would like to:

• Buy cryptos directly and have access to more crypto coins,
• Trade anonymously,
• And have control over your wallet by minimize 3rd party risk,

Then, you should have a wallet directly on the blockchain network or a wallet that you can access from a non-custodial exchange. These are the most popular non-custodial exchanges:

Note: This article was originally written by former AIMultiple industry analyst Izgi Arda Ozsubasi and reviewed by Cem Dilmegani

For more on cryptocurrency

If you’d like to learn more on cryptocurrencies, read:

• What are Crypto Derivatives? Types, Features & Top Exchanges
• 44 Cryptocurrency Stats: History, market, adoption, users& crimes
• Cryptocurrency ETFs: Pros, Cons & Alternatives in 2022

Finally, if you believe you would benefit from staying up-to-date on crypto fluctuations, consider investing in cryptocurrency APIs. We have a data-driven list of the top 577 on the market.

We will help you choose the best one tailored to your needs: