Non-fungible tokens, or NFTs, are pegged as the Next Big Thing in the decentralised finance (DeFi) ecosystem. Artists around the world are converting their videos, paintings, images, and other creations into NFTs and some of these NFTs are being sold for very large sums of money.

However, to trade or store NFTs (or any other crypto assets), you need the help of custodial/non-custodial services. Let’s find out what custodial and non-custodial services are, to help efficiently trade in NFTs and other crypto assets.

Understanding NFTs

Crypto tokens like Bitcoin and Ethereum are the native cryptocurrencies of their respective blockchains. They are fungible, which means that their value can be perceived, and they can be traded over crypto exchanges. On the other hand, non-fungible tokens (NFTs) have data about a particular digital asset’s ownership coded into them.

NFTs are associated with specific digital assets such as artwork, music, collectables, etc. Only one NFT can ever represent a particular asset, and two of the same kind cannot exist. Their rarity creates a scarcity in the crypto markets and fuels demand, in turn, allowing them to appreciate over time.

Also read: Ozzy Osbourne's NFT project shared scam link that drained crypto from investors' wallets

NFTs can be created (or minted) thanks to their tamper-proof nature, which is enabled by blockchain technology. This means that the digital creation must be uploaded to an NFT marketplace as a file and exchanged for cryptocurrency. Smart contracts allow the exchange of these digital assets without involving a third-party or middleman and open access to a large audience for transacting.

Gaining ownership of an NFT is possible either through a purchase or by minting it, and crypto wallets can be used to store these NFTs. There are two kinds of NFT wallets--custodial and non-custodial. Before we delve deeper, it is important to note that a crypto wallet has two2 unique identifiers--a public key and a private key.

The public key is like an email address; it provides transactors with a destination to send the cryptocurrency. The private key is like a password and is used to authenticate transactions for the sender of the cryptocurrency. If the private key is lost, the sender loses transaction access and cannot authorise the debit of crypto assets from the wallet.

Also read: ICC unveils 'Crictos' NFT collection from 2015, 2019 World Cups

Custodial Wallet

The private key of such wallets is entrusted to a third-party or custodian. The custodian’s job is to guard the key and protect the assets of the wallet owner. The wallet owner can choose the extent of control s/he wishes to grant the custodian and may even assume the responsibility of safeguarding the assets himself/herself.

Some custodial wallets allow users to store their crypto assets but not their private keys. Other custodial wallets let users assume complete control of the wallet, including its private key.

These wallets are the easiest to set up and hence are also the most user-friendly. The presence of a third-party custodian also eases the burden of remembering a complex private key. And recovering any misplaced information is as easy as contacting the custodian and asking for it.

However, a custodial wallet also has some drawbacks, the lack of privacy for one. Since users have to complete the Know Your Customer (KYC) formalities by submitting their personal documents, their anonymity can be compromised.

Also read: Meta working on features to create, sell NFTs

Non-Custodial Wallet

A non-custodial wallet provides users with 100 percent control over their NFT ownership. This means that the user not only has access to funds transfer but also to NFT trading. And since a third-party custodian is not involved, the onus of remembering complex passwords lies with the wallet owner. Should that piece of information be lost, the wallet user will lose all associated crypto assets as well as the access to them forever--a major drawback.

Such wallets are also less user-friendly for novice investors who neither have much knowledge about the crypto market, nor the assets it covers. Nonetheless, a crucial benefit of non-custodial wallets is that users can choose the transaction fee they wish to pay based on how fast they want it processed.

Also read: Art NFTs: Are AI-generated images the Next Big Thing in the metaverse?

Key differences in NFT marketplaces

Marketplaces can also be of two types--custodial and non-custodial. Usually, most marketplaces do not accept custodial NFTs as the third-party can exercise control on their transfer. Custodial marketplaces are also carefully curated, and it is possible that some NFTs may not appear on them. Moreover, custodial marketplaces play a fiduciary role for NFT owners as users entrust the platform with their added funds before they actually transact.

In contrast, non-custodial marketplaces remain uncensored, and the entire collection (across all types of NFTs) is showcased on the platform for interested buyers. They also protect the anonymity of all users whilst providing them with a forum to connect with each other. E.g., OpenSea and SuperRare.

Knowing these differences is important as most investors remain unaware that such options exist in the crypto universe and that certain responsibilities can be outsourced. With the information at hand, users can easily decide how they want their NFTs managed and securely stored.

Also read: This NFT collection sells for millions; and it’s just a bunch of selfies