Difference Between Custodial vs Non-custodial Cryptocurrency Exchanges

By: | Updated: Apr-9, 2023
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A cryptocurrency exchange is a platform designed to enable users to buy, sell, and trade their cryptocurrencies. They function in a similar way to stock exchanges, basically providing a marketplace for users to perform their financial operations in a fast and safe manner. 

Users can fund their accounts with fiat currency or other cryptocurrencies to purchase or sell cryptocurrencies. Such platforms work in both ways, i.e., letting you buy crypto with fiat money and vice versa. Cryptocurrency exchanges charge fees for trading and may also require fees for depositing or withdrawing funds. Exchanges can be centralized or decentralized.

Centralized ones are owned and operated by a single company responsible for storing users’ funds and facilitating trades. Decentralized ones, on the other hand, operate on a distributed ledger, such as a blockchain, and allow users to trade cryptocurrencies directly with each other without the need for a centralized intermediary. After trading, it’s typical to store crypto in wallets. There are plenty of wallets to use, starting from standard mobile to more token-specific best ETN wallets and similar. 

There’s also the division of all these kinds of wallets into custodial and non-custodial, depending on whether the platform holds custody of users’ assets. Let’s dwell on their peculiarities in the next few paragraphs. 

Difference Between Custodial vs Non-custodial Cryptocurrency Exchanges

Pluses and Minuses of Custodial and Non-custodial Exchanges

In such platforms, a huge difference makes storing or not storing the user’s funds. 

Custodial cryptocurrency exchanges are platforms where users can buy, sell, and trade cryptocurrencies while the trading service holds custody of their funds. In essence, the users’ cryptocurrencies are stored on its servers or wallets, and they don’t have control over their private keys. Thus, the service is responsible for securing the funds, and users need to trust them to keep their funds safe.

Non-custodial services for cryptocurrency trading, on the other hand, are platforms where users retain custody of their cryptocurrencies. In this case, users are responsible for storing their private keys, and the exchange is a facilitator for trading cryptocurrencies. They usually work by connecting buyers and sellers directly without performing the role of holding any funds or assets.

If you think that it is enough to look at these types of exchanges at the surface level and be able to decide, don’t rush. There’s more to know. 

Pros and Cons of Custodial Exchanges

Custodial services offer the following benefits: 

  1. Greater user-friendliness in the interface.
  2. Often offers nice additional features, e.g., making advanced orders or taking part in margin trading. 
  3. Quicker cryptocurrency purchases due to better liquidity. 
  4. Effective security measures: two-factor authentication, cold storage, etc.  
  5. Dedicated and responsive customer support. 

They also have a few drawbacks: 

  1. Users have to trust the services to keep their funds secure while risks of security breaches such as exchange hacks exist.
  2. Centralized control: government regulations make such platforms subject to restrictions. 
  3. Fees can be higher than at non-custodial platforms. 

Pros and Cons of Non-custodial Exchanges

Pros of a non-custodial exchange include:

  1. Increased security as users retain control of their funds in their personal wallets rather than trusting the exchange to keep their funds secure. This reduces the risk of hacks or breaches that could result in the loss of funds.
  2. Privacy: users can maintain their privacy by not sharing personal information.
  3. Control over funds, including the ability to move them in and out of the exchange at any time without approval.
  4. Decentralization: trading directly with each other without relying on centralized authorities.

Cons include: 

  1. Complexity: non-custodial platforms can be more challenging to use, and users need to be familiar with managing their own wallets, which can be difficult for beginners.
  2. The immense responsibility of users for the security of their funds means they need to be vigilant against potential threats, such as phishing attacks or malware.

An example of a non-custodial trading platform with lots of trading offers is LetsExchange: it offers exchanging TRX to BTC and over 4 million other trading pairs. 

To sum it all up, cryptocurrency exchanges play a crucial role in the cryptocurrency ecosystem and help to establish the value of digital assets. Both custodial and non-custodial platforms can be top options, depending on users’ goals, background in the sphere, and skills in managing their digital assets. 

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