In the world of cryptocurrency, you might have heard about "non-custodial wallets" like Trust Wallet. These digital wallets offer a unique approach to self-manage your crypto assets. Initially, users may expect to use this software like any other application or website, but there is a fundamental difference between traditional financial services and decentralized applications (dApps) in the crypto world, also known as Web3. Here’s a quick overview of how decentralized apps work and why they differ from traditional financial services.
Decentralized software versus centralized services
If you open an account on Amazon or any other shopping website, you're usually asked to create an account. While not always mandatory, it's convenient for regular use, order tracking, and returns. These websites and their systems are stored on a server, making them "centralized." This allows the site owner to manage products, adjust prices, and help you recover lost passwords. While this centralization is convenient for shopping and other services, the Web3 movement believes such control should not apply to managing your savings.
Do you trust all banks?
This is why developers began to rethink and create a complex system to enable people to save their money without relying on a centrally controlled entity, such as a bank. This initiative gained momentum after many lost their savings and homes during the 2008 financial crisis. The need for such a system is not a past problem — as recently as 2023, six banks holding a total of $550 billion USD in assets went bankrupt, significantly impacting the global financial system.
Power to the people!
This is the fundamental idea behind the Web3 movement. Nobody should have to rely on the belief that their bank will always act in their best interest, as these profit-driven institutions often prioritize their business model over clients. Worse yet, some countries have inadequate banking networks or discriminatory practices, denying individuals the ability to save their money safely. Other banks restrict currency exchange options, forcing people to watch their savings lose value due to high inflation. Web3 aims to provide everyone with the opportunity to save, exchange, send, or receive money globally, regardless of their location or financial status.
12 words for independence
To eliminate the centralized control of banks and other entities, software engineers developed the blockchain, starting with Bitcoin and later Ethereum. Saving money on these chains requires knowing your seed phrase, typically 12 unique words. This seed phrase acts as your personal, private key, generated through a complex mathematical formula when you create a new wallet. The system is designed so that only you can see and access your 12-word seed phrase. Why? Because crypto engineers wanted to eliminate the control of central entities like banks or any other person over your assets, and also keep your assets safe from thieves. This setup ensures that you alone have control over your money. It also means that no one else can help manage your wallet. If anyone else could restore your wallet, they could potentially take away your money, undermining the principle of complete ownership and control.This design ensures that you remain the sole sovereign of your property, without any centralized entity being able to restore or seize your wallet.
Where is my money?
It is in your hands alone! This is why you don't create an account managed by Trust Wallet, for example, but rather possess a wallet on the blockchain. Only you can make transactions. This is the beauty of the blockchain: if you memorize your 12-word seed phrase or private key, you can use any decentralized crypto wallet software to access your funds. Unlike a traditional account, you can switch providers easily.
To clarify, your funds aren't in an account or the wallet itself. Your tokens and coins are entries on a decentralized public ledger called the blockchain. To alter these entries, you must prove ownership with your private key. Decentralized crypto wallets like Trust Wallet or MetaMask offer user-friendly software to simplify these adjustments (sending or receiving funds).
Decentralized crypto wallets do not have clients — just users:
Decentralized software wallets like Trust Wallet or MetaMask don't provide traditional accounts. Instead, you choose their platform to access your funds directly on the blockchain. This fundamental difference has several important implications:
Transaction control: Wallet providers cannot block, reject, or reverse your transactions.
Account access: They cannot freeze your account or restore passwords/seed phrases.
Fund ownership: Your money is not held by the wallet provider but exists "on-chain."
Provider independence: The success or failure of the wallet provider does not affect your funds.
Portability: If a wallet service shuts down, you can easily switch to another compatible wallet without losing access to your assets.
True ownership: Your money remains entirely under your control at all times.
This decentralized approach ensures that your cryptocurrency remains your property, regardless of the software you use to interact with it. You maintain full custody of and responsibility for your digital assets.
The power of private keys
Your private key is a highly confidential password that grants you complete control over your cryptocurrency. When you create a non-custodial wallet, only you have access to this private key.[1]
Why is this important? Because whoever holds the private key has full control over the associated cryptocurrency. It's akin to possessing the only key to a safety deposit box that no one else can access or open. This version is more concise and flows better
How non-custodial wallets differ from banks
To understand why non-custodial wallets can't interfere with your transactions or share your data, let's compare them to traditional banks:
The flip side: personal responsibility
While all of this might sound great from a privacy and control perspective, it's important to understand that it comes with significant responsibility. Since you're the only one with access to your private keys, you're also the only one responsible for keeping them safe. [4] Scammers and malicious actors know this, and are incentivized to target the humans who control the private keys.
If you lose your private keys, there's no bank customer service to call, and no password reset option. Your crypto could be lost forever. This is why it's crucial to follow best practices for securing your private keys and backup phrases when using non-custodial wallets.
Conclusion
Non-custodial wallets offer a level of financial autonomy that's unprecedented in the digital age. They can't block your transactions, freeze your assets, or share your personal information because they simply don't have that power or information to begin with. You're in complete control.
However, this control comes with responsibility. As we continue to navigate the evolving world of cryptocurrencies, understanding these fundamental concepts will be crucial for anyone looking to participate in this new financial ecosystem.
Remember, in the world of non-custodial wallets, you are your own bank. And while that comes with great power, it also comes with great responsibility.
[1] https://dl.acm.org/doi/pdf/10.1145/3613904.3642464
[2] https://uqualify.co/udiscover/what-is/bitcoin-vs-traditional-banking-a-comparison/
[4] https://arxiv.org/pdf/2010.12415
[5] https://www.sciencedirect.com/science/article/pii/S0267364923000390#sec0011