Crypto Wallets 101: Custodial vs. Non-Custodial & Avoiding Scams

In this episode we explain custodial and non-custodial cryptocurrency wallets, highlighting their fundamental differences, security implications, and user control. Custodial wallets entrust a third party with managing private keys, offering ease of use but less autonomy. Conversely, non-custodial wallets grant users complete control over their keys, emphasizing security and self-reliance, as underscored by the "not your keys, not your coins" principle. The Federal Trade Commission warns about cryptocurrency scams, often involving demands for payment in crypto and impersonations. Ultimately, the choice between wallet types depends on individual user needs and risk tolerance in the evolving cryptocurrency landscape.

• What are the key differences between hot and cold cryptocurrency wallets?
• What is the significance of private keys and seed phrases in cryptocurrency wallets?
• What are custodial and non-custodial cryptocurrency wallets?
• What are some common cryptocurrency scams that users should be aware of?

Glossary of Key Terms

• Blockchain: A decentralized, distributed ledger that records transactions across many computers. This record is permanent and cannot be altered without the consensus of the network.
• Cold Wallet: A cryptocurrency wallet that is not connected to the internet, providing a higher level of security against online threats. Examples include hardware wallets and paper wallets.
• Cryptocurrency: A digital or virtual form of currency that uses cryptography for security. It operates independently of a central bank.
• Custodial Wallet: A cryptocurrency wallet service where a third party (e.g., an exchange) holds the private keys on behalf of the user.
• Decentralized Exchange (DEX): A cryptocurrency exchange that operates without a central authority, allowing users to trade directly with each other.
• Fiat Currency: Government-issued currency that is not backed by a physical commodity, such as the US dollar or Euro.
• Hot Wallet: A cryptocurrency wallet that is connected to the internet, offering convenience for transactions but with a higher risk of online attacks. Examples include mobile, desktop, and web wallets.
• Malicious Contract Approval: A deceptive transaction where a user unknowingly grants a smart contract permission to access and spend their cryptocurrency.
• Non-Custodial Wallet: A cryptocurrency wallet where the user has full control of their private keys.
• Phishing: A type of online fraud where attackers impersonate legitimate entities to trick individuals into revealing sensitive information or performing malicious actions.
• Private Key: A secret, cryptographic code that allows the owner to access and manage the cryptocurrency associated with a specific wallet address.
• Public Key: A cryptographic code derived from the private key that can be shared and is used to receive cryptocurrency. A wallet address is a human-readable version of the public key.
• Rug Pull: A type of cryptocurrency scam where the creators of a project artificially inflate its value and then suddenly abandon it, selling off their holdings and leaving other investors with worthless tokens.
• Seed Phrase (Recovery Phrase): A sequence of 12 to 24 words that serves as the master backup for a non-custodial cryptocurrency wallet, allowing for the recovery of the wallet and its private keys.
• Smart Contract: A self-executing contract with the terms of the agreement directly written into code. They run on blockchain networks.
• Spam Coins (Airdrop Scams): Unsolicited cryptocurrency tokens sent to wallet addresses, often as part of a scam to lure users to malicious websites or trick them into performing harmful actions.
• Two-Factor Authentication (2FA): An extra layer of security that requires a second verification step, in addition to a password, to access an account or perform a transaction.