Custodial NFTs: What You Need to Know

NFTs offer an exciting way for people to own art from their favorite creators without taking up space in their homes. Additionally, NFTs have evolved for numerous use cases, including gaming, event tickets, and music royalty distribution. As more people get involved with NFTs, they learn about the differences between a custodial NFT and a non-custodial NFT, as well as how that relates to custodial and non-custodial wallets.

Crypto wallets are an essential part of the web3 ecosystem, because they enable the storing and transferring of crypto assets. These wallets require the use of encrypted alphanumeric codes, similar to passwords, called keys. A public key gives people limited, controlled interaction with a wallet, but only the person with the private key can conduct transactions.

Wallets are either custodial, meaning a third party manages the private keys, or non-custodial, meaning the user manages their own keys. Custodial wallet advocates believe they offer a beginner-friendly way for people to get involved in crypto. Critics say you can't truly own your digital assets if another entity controls your private keys.

In this article, we'll take a look at custodial wallets and NFTs, and their pros and cons.

Custodial NFTs

To buy an NFT, you must have a crypto wallet to store it in. Cryptocurrency exchanges like Coinbase and some NFT marketplaces like Nifty Gateway offer a custodial crypto wallet service. When you use these services, you opt to have the platform manage NFT custody for you, meaning you don't have to remember your private keys. NFTs stored in custodial NFT wallets are known as custodial NFTs.

A custodial NFT wallet is an excellent choice for any beginner unfamiliar with managing keys and assets. This option leaves the technical aspects of NFT and cryptocurrency ownership to another party. These wallets are also good for those afraid of losing their private keys. If you lose your private key, you lose access to your digits assets. For instance, in 2021, Ukrainian parliament member Davyd Arakhmia accidentally deleted an encrypted file containing his private key, resulting in a $25 million loss. Had he used a custodial wallet, a third party would have managed that key for him.

Non-custodial NFTs

A non-custodial cryptocurrency wallet gives the user complete control over their private keys. It's up to the user to remember their keys and keep them safe. A non-custodial NFT is any NFT stored in a non-custodial wallet.

The non-custodial wallet is ideal for anyone wanting true ownership of their non-fungible tokens. They don't have to worry about the NFT marketplace or crypto exchange taking their assets. Although this may sound unlikely, Coinbase has acknowledged the possibility in a 10-Q filing with the SEC. In this document, Coinbase states: "because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors."

This revelation sent a shockwave through the crypto space, with many investors stating they would send their tokens to a non-custodial wallet.

Non-custodial NFT marketplaces and wallets are also ideal for those who want to maintain privacy. In most cases, a custodial marketplace is required to conduct know-your-customer (KYC) verification. KYC checks are necessary for financial institutions to ensure you are who you say you are. This process often involves sharing a photo of your driver's license or social security card.

How they stack up

Custodial wallets are akin to leaving your money in a banking institution, while non-custodial wallets are like storing your money in a safe in your home. A custodial NFT marketplace makes it easier to manage your tokens and passes the job of protecting them to a third party. Additionally, you'll typically have access to a robust customer service team that can help you if you encounter problems with your wallet.

However, custodial crypto assets can be lost if the marketplace files for bankruptcy or turns out to be a scam. For example, FTX customers' funds were being diverted to a privately-held crypto hedge fund without their knowledge. This wide-scale fraud highlights the inherent risks of custodial wallets.

Non-custodial crypto wallets are the best option for those who want complete control of their assets, but they can be risky because owners must keep up with and protect the private keys. These wallets typically have little to no customer service. As we have mentioned, if an NFT owner loses the private key, the NFT is gone. If the owner of a safe lost the combination, he could perhaps blow it open, hire a safe cracker or contact the safe manufacturer. A custodial wallet owner who loses a private key has no recourse whatsoever.

If you use a non-custodial wallet, it's best to store your private key in multiple safe locations. Encrypted files on your computer can help keep your keys safe, but it's best to have a physical backup in case you lose your computer or accidentally delete the file. Writing your private key down and storing it in a safe is a simple way to have a physical backup handy.

If you're interested in using a custodial NFT marketplace, consider Nifty Gateway. This hybrid marketplace lets users choose whether to send their NFTs to a non-custodial wallet or store them in a Nifty Gateway custodial wallet.

The Hedera network has numerous options for those interested in exploring non-custodial wallets. For example, SaucerSwap is the leading decentralized exchange on the Hedera network. It lets you trade cryptocurrencies and store them in your own non-custodial wallet. This DEX is supported by the HBAR Foundation and was audited by Hacken, a leading blockchain security company.

Zuse Market, built on Hedera, is an ideal solution for those interested in non-custodial NFTs. Zuse is packed with robust tutorial videos and FAQs, making it an excellent choice for beginners.

Should you use a custodial NFT?

Custodial NFTs offer an easy way for people to get involved in the NFT ecosystem. Custodial wallets eliminate the need for users to manage their private keys, and many custodial wallet providers have customer service teams standing by to help when you run into problems.

However, as many custodial wallet critics say, "not your keys, not your tokens." Custodial wallet providers have the ability to take your tokens or use them how they see fit. Although this is rare, the FTX scandal highlights that it can happen with well-known and trusted custodial wallet providers.

The Hedera network makes it easy to mint and manage NFT tokens. It has numerous non-custodial wallets to choose from and low fees that make NFT trading easy.