Non-custodial by design: take the driver's seat toward crypto

Thiago Earp
Reading time:
6 minutes

Cryptocurrencies were created to give us control over our money, and recent failings by trusted third parties show that this ethos is as relevant as ever.

Last edited on
February 1, 2023

“Where do I buy crypto?” is the first question anybody asks when joining the space. Too often the answer is to go through a service where, initially, your funds will be held in an account that isn’t controlled by you.

Many users will leave their funds in these accounts under the false impression that the service is similar to a bank (and that their deposits share the same security guarantees offered by regulated banks), but that’s just not the case.

However, that’s not to say one can’t hold crypto in a safe way. Unfortunately, though, not everyone is aware that there are safer options where you're in control of your funds at all times.

When buying cryptocurrency, you actually have two options:

  • A centralized exchange tied to an exchanged-controlled custodial wallet where you’re not in complete control over your assets, or;
  • A fiat<>crypto on-ramp/off-ramp solution coupled with a non-custodial wallet, where you are in control of your funds from the start.

Let’s look at the fundamentals behind these options and how you can have full control of your crypto at all times.

Understanding wallets

Let's start with wallets. Essentially, a wallet is a system for signing transactions that allow funds to be sent.

Most blockchains rely on something called public-key cryptography to ensure the security of users’ funds. In this system, you have a cryptographic key-pair consisting of two keys:

  • Your public key, that can roughly be thought of as your bank account number, and is the basis for your blockchain address(es).
  • A corresponding private key — roughly equivalent to your personal pin code — that tells the network that you have legitimate access to the funds that are associated with that address.

An important feature of this is that each public key is inextricably associated with a single private key, and that this relation is rooted in cryptography.

Here’s an extremely oversimplified example:

If you want to send 0.1 BTC to someone, you have to sign a transaction that approves the subtraction of 0.1 BTC from your account and the addition of 0.1 BTC to their account. This transaction only takes place if I’m able to provide the unique private key that pairs with the public key that holds the funds.

This is why the question of who holds the private keys to a crypto address is essential. Wallets are just a system that makes it easy to sign transactions without having to go into the technical details every time.

The main difference between wallet types that we should pay attention to is which ones are custodial (i.e. controlled by a third party who then grants you access to the funds therein) and which are non-custodial, where private keys are entirely controlled by you.

Custodial vs. non-custodial wallet

As you might have guessed, a custodial wallet is one in which your digital assets are held for you by a third party. Essentially, you’re trusting someone — often a centralized exchange — to hold and manage the private keys to your crypto on your behalf.

The main issue with a custodial setup is that your funds are at the mercy of a third party. For example, you can lose your funds if they go bankrupt, get hacked, or simply decide to disappear with your money - and you’ll have no recourse.

On the other hand, a non-custodial wallet — also known as a self-custodial wallet — provides you with full and exclusive control of your private keys. These are never shared or held by any third-party, therefore, your digital assets are in your possession and control at all times.

The downside to that is that you are responsible for making sure your keys are safe. If you lose them, you may lose your funds.

That said, a lot of progress has been made in creating safeguards and alternative means to safely store your keys that don’t depend on giving them away to a third party.

Why choose a non-custodial wallet?

There are some advantages to custodial wallets.

Let’s say a user loses access to their non-custodial wallet. They then lose access to their crypto and there's nothing they can do about that.

In such cases, custodians typically allow you to reset your password in the same way you might do so on eCommerce or email accounts.

The problem is that by using a custodian, you're placing your trust in their honesty, integrity, and ability to keep your crypto safe and to give you uninterrupted access to your assets whenever you want them.

The issue is, they hold your private keys and thus have the technical capacity to manage, or mismanage, your funds as they please — even if they promise not to do so.

While most of the time a custodial wallet will allow a company to offer you a more simple and straightforward experience when using crypto, this comes at a risk, as recent developments in the crypto industry have shown.

On the other hand, not only does a self-custody wallet give you greater control over your assets, but you can do more with them.

For example, if you want to explore decentralized apps like Uniswap to trade tokens or OpenSea to buy and sell NFTs, you’ll need a non-custodial wallet.

Understanding exchanges

Now, let’s look at what exchanges are. Whenever you wish to trade one asset for another, you need to find people who will match your offering with the asset of your choice.

Traditionally, this is handled by an order book. This is simply a mechanism that matches buyers and sellers looking to trade assets. It lists all parties who are willing to acquire one item in exchange for a specific amount of another.

Example: If you hold 3 BTC and want to trade that for 14 ETH, an exchange matches you with one or more persons willing to make that deal on its order book, and mediates the transaction.

This is how most cryptoasset purchases take place for first-time users. They pay a certain amount of fiat currency, expecting to receive a certain amount of a cryptoasset on an exchange’s order book.

In order to keep the order book running efficiently, these transactions take place between accounts that are stored in the exchange’s servers — along with customers’ funds.

That’s why they’re usually called centralized exchanges: all the steps of the exchange are happening on a proprietary platform that has control over users’ wallets in order to execute the transaction. These wallets are custodial. The exchange, not the user, is the owner of the wallet that holds your funds.

Decentralized exchanges

This is not the only option when exchanging one cryptocurrency for another, though. There are also decentralized crypto exchanges (DEXes), which have surged in popularity as a cornerstone of decentralized finance (DeFi).

A decentralized cryptocurrency exchange creates the means for peer-to-peer transactions to take place. It lets you interact with other people in the market for crypto assets directly from a wallet that only you control, a non-custodial wallet.

In fact, most DEXes today have moved beyond the concept of the order book. They now rely on smart contracts and an algorithm that enables you to buy and sell digital assets directly from a liquidity pool.

Decentralized exchanges vs. centralized exchanges

The vast majority of crypto purchases still happen through centralized exchanges, but alternative points of access and user journeys are beginning to pick up steam.

Sure, custodians such as centralized exchanges simplify account setup to an extent, and after the initial transaction, you can always relocate your assets somewhere else.

However, these arguments are looking increasingly weaker in the face of much improved UX from non-custodial wallets and decentralized exchanges.

What if your centralized custodian of choice is hacked? What happens if it mishandles your funds? What if it goes bankrupt?

In 2022, we saw the implosion of FTX and others such as Celsius Network, BlockFi, and Voyager Digital. These are a stark reminder of a cold hard truth: your digital assets may not be safe on a centralized exchange or custodian, no matter how shortly they stay there.

While an exchange with a custodial wallet might reduce your effort and personal responsibility, ultimately it requires your trust in the custodian that holds your funds.

Unlike with your bank, centralized cryptocurrency exchanges aren't usually insured. Many are registered in off-shore jurisdictions where recourse may be harder and costlier — so in the event of a hack or a bankruptcy, it's more likely that you'll not recover your cryptoassets.

Replacing centralized custody through self-custody

So, with self-custody and a decentralized exchange, you have the option to bypass centralized third parties to hold or trade crypto - it’s your choice. But what about that first step of the initial crypto purchase?

While decentralized exchanges do away with the need for custody between people who already own crypto assets, we still haven’t seen the alternative answer to the original question of “where do I buy crypto?”

This is where non-custodial fiat<>crypto on-ramp services like Ramp come in.

That first step of purchasing crypto assets with fiat can bypass third-party custody of your assets and be settled directly into your own non-custodial wallet.

End-to-end services handle the onboarding by settling the fiat payment and depositing the corresponding crypto directly into a wallet that you control.

As general audiences become more familiar with the technical aspects of crypto, it’s also becoming more common for people to take the non-custodial route from the get-go. And as end-to-end solutions evolve and enable safer, custody-free exchanges, the need for centralized third-party custodians is becoming more of a personal choice than the only available pathway.

Take the driver’s seat toward crypto

Looking to take control over your crypto? Try out our fully non-custodial buying and selling experience now!

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Thiago Earp

Content Lead at Ramp Network.
Writer, Web3 & Blockchain educator.


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