Non-custodial vs. Custodial wallets
When interacting with a DAO, such as casting a vote, you’ll need a non-custodial wallet. Sometimes called a decentralized wallet, these wallets are not run by a centralized company. Instead, a non-custodial wallet is a piece of code that allows you to interact with the blockchain without a middleman.
Having a non-custodial crypto wallet means that you alone have access to your crypto. There’s not a bank or company holding your assets for you. This can be liberating, but it also comes with the responsibility of keeping your wallet secure.
Just like a real-life wallet filled with cash, if you lose your wallet, your funds are gone. There are no customer service lines to call or insurance to back it up. So, each step should be taken very seriously.
A custodial wallet is a wallet in which another party controls your private keys. For example, Coinbase and Gemini are custodial wallets.
While a custodial wallet lessens personal responsibility, it requires trust in the custodian that holds your funds. You also typically can’t sign into decentralized applications with a custodial wallet, and you often can’t purchase or receive governance tokens, since those are often only listed on decentralized exchanges.
When you set up a non-custodial crypto wallet, you’ll receive a secret recovery phrase, which is a list of 12 to 24 words that you can use to restore the wallet in case you lose access. It’s essential to write this phrase down on multiple pieces of paper and store in various safe places. Never write your seed phrase on anything that touches the internet, or give it to anyone. Security is in your hands.
Setting up a custodial wallet will look more familiar to you. You’ll likely connect your bank account or credit card, and do a KYC process where you'll share aspects of your identity. You’ll also get verification emails and information from the company. When using a custodial wallet, security is in the hands of the company.