As of December 2022, there were 420 million crypto owners.
At the same time, we know that centralized finance is weakening — decentralized technologies and crypto offers a new path forward for the common investor and saver.
Despite these two trends, the web3 industry has some growing pains. One of the most challenging of which to overcome is the difficulty of self-custody, which leaves average consumers feeling like they’re navigating a minefield.
What if there was a better way?
Enter the custodial wallet — a must-have tool for the future of web3 finance.
But wait, hold on. What’s wrong with self-custody?
The Challenges of Self-Custody
Self-custody is the managing of your own private keys, which you use to access and manage your cryptocurrencies, NFTs, and other digital assets.
Many technologists tout self-custody as a critical advantage of web3, but they forget about the average consumer. Self-custody can be difficult and risky for many users — especially beginners.
Example: have you tried explaining to Uncle Bill how to use a Ledger cold storage wallet and seed phrase? Yeah, it’s not easy.
Because of this challenge, web3 cryptocurrencies and decentralized finance don’t get the buy-in they probably deserve.
Here’s where self-custody falls short of revolutionizing the financial industry:
We aren’t going to sugarcoat it — many self-custody solutions have horrible user experiences. Which obviously causes lower adoption and a lack of understanding among mainstream users.
Managing private keys is difficult and confusing, particularly for crypto and DeFi beginners. Losing a private key means permanent loss of your assets. This is risky business. There are a number of providers and startups looking at solutions for key management, but as of today, these are still in their infancy.
Self-custody carries significant risks, particularly for users who aren’t familiar with private key best practices. Again, if you lose your private keys or they’re stolen, it’s game over for your digital assets.
Why Custodial Wallets Might Be an Answer
Custodial wallets offer an alternative to self-custody that can help address some of those challenges.
A “custodial wallet” is just a wallet where a third-party service provider like Coinbase, Kraken, Robinhood, or Magic hold and manage the wallet’s private keys on your behalf – just like a traditional bank holding and protecting your money on your behalf. Meaning you don’t have to confront the risk of losing your private keys every time you try to access your digital assets.
There are many advantages associated with custodial wallets.
Want more security over your assets? Custodial wallets often have more resources and expertise to devote to security measures. Meaning, you can rest easy knowing your crypto is safe.
Ease of Use
Custodial wallets are typically far more user-friendly than self-custody solutions, particularly for average consumers buying, selling, or trading crypto, DeFi, or NFTs for the first time. You don’t have to understand or worry about seed phrases, private keys, “signing transactions”, and all the other technical details related to managing a digital wallet.
If you’re skeptical of self-custody options like Trezor and Ledger, custodial wallets offer users the ability to trust a third-party service provider to manage their digital assets. This trusted party is governed by laws and regulations with things like insurance and duty of care that ensure your assets are safe and often recoverable from any illegal activity. You can trust the bank because you know if they mishandle your money, you can bring them to court to get your money back. The same is not true with a self-custodial wallet — there is no entity (other than yourself) to hold liable.
Custodial wallets offer some clear benefits. But it’s equally important to note that if web3 has any chance of going mainstream, the industry as a whole needs to prioritize onboarding experiences for the next 400 million users.
The Role of Custodial Wallets in a Web3 Future
Custodial wallets will play an important role in the future of web3 and decentralized technologies. If custodial wallets succeed, you can bet your bottom dollar crypto and NFTs are here to stay.
Here are some of the ways in which custodial wallets can help to drive adoption and facilitate new use cases:
Bridging the Gap Between Traditional Finance and DeFi
Custodial wallets will bridge the gap between traditional finance and DeFi by offering a familiar user experience and an easy on-ramp for beginners to web3 tech.
Driving Mainstream Adoption
Custodial wallets will drive mainstream adoption with security measures that are more in line with what average consumers are accustomed to.
Enabling New Use Cases
Personal computers paved the way for remote work. In addition to advanced security protocols and better user experiences, what will custodial wallets bring in the future? Let’s experiment!
As web3 technology evolves and matures, custodial wallets will become an increasingly important part of the ecosystem — especially if we want to onboard another half million users.
While self-custody will always have a role with the more advanced crypto and DeFi holders, custodial wallets will address security and user experience challenges for average consumers, like Uncle Bill.