Comparing the Onboarding Experience: Custodial Wallets vs. Self-Custodial Wallets

The debate between custodial wallets and self-custodial wallets is at the heart of cryptocurrency adoption, revolving around security, control, and ease of use. In this article, we’ll examine the onboarding journey for both options, focusing on major players in the space to provide a clear comparison and help users make informed decisions.

Custodial Wallets: Kraken Digital Asset Exchange , Binance and Coinbase

Custodial wallets, like Kraken, Binance, and Coinbase, are designed to feel similar to traditional banking apps. Their user interfaces are intuitive and cater to users who may already be familiar with neobank platforms. The onboarding process typically begins with a Know Your Customer (KYC) verification, where users provide identification to comply with regulations. While some may find this step intrusive, it ensures a secure environment for transactions and investments.

Onboarding a custodial wallet usually takes between five and ten minutes, depending on the speed of the KYC process. Once completed, depositing funds is a seamless experience, with options such as bank transfers and card payments clearing within seconds to minutes. After funds are available, users can purchase cryptocurrency immediately. Fees for these transactions vary, with bank transfers often incurring low costs (around 0–1%) and card payments attracting higher charges, sometimes up to 3%.

Custodial platforms offer regulated environments where funds are insured to a certain extent. However, the reliance on these platforms does introduce risks. High-profile failures, such as the collapse of FTX, highlight the potential for users to lose funds if the platform becomes insolvent. While custodial wallets reduce user responsibility for security, they require a significant degree of trust in the platform’s reliability.

Self-Custodial Wallets: MetaMask , Phantom , Exodus , and Trust Wallet

Self-custodial wallets, including Metamask, Phantom, Exodus, and Trust Wallet, provide a starkly different experience. Users are responsible for setting up their wallets, typically by creating a 12- to 24-word seed phrase and a password. While this process takes only a few minutes, it comes with a crucial caveat: losing the seed phrase or password results in permanent loss of access to funds. This responsibility can feel overwhelming, particularly for beginners.

Some wallets now offer passkey options, which simplify the setup process but come with their own risks. Passkeys may enhance the user experience, but they also introduce vulnerabilities, especially if not paired with additional security measures. For those seeking maximum protection, pairing a self-custodial wallet with a hardware wallet such as a Ledger or Trezor is the best option. While this combination significantly bolsters security, it complicates the onboarding process and requires users to invest time in understanding how these devices work.

Funding a self-custodial wallet is another challenge. Direct on-ramps like Mercuryo, MoonPay, and Transak allow users to buy crypto within the wallet, but these services often charge high fees — up to 4% for card transactions and around 2% for bank transfers. Additionally, they may require a separate KYC process. Alternatively, users can transfer funds from a custodial wallet, though this method necessitates completing the custodial onboarding process first. While these steps can feel cumbersome, selecting the right on-ramp provider can mitigate some of the hassle.

Security is where self-custodial wallets truly shine. By taking control of their funds, users eliminate the risk of losing money due to platform failures. However, this autonomy comes with significant responsibilities. Losing a seed phrase or falling victim to scams can result in irreversible losses. Scams targeting self-custody users range from phishing websites to address manipulation and remote access attacks. For maximum protection, hardware wallets — also known as cold wallets — are essential. These devices keep private keys offline, shielding them from online threats. Although they add complexity to the setup process, their security benefits far outweigh the drawbacks for serious investors.

Summary: Custodial vs. Self-Custodial Wallets

Custodial wallets are a great choice for those who value convenience and ease of use. They offer a quick onboarding process, fast funding options, and a user-friendly experience that’s ideal for beginners. However, their reliance on third-party platforms introduces a level of risk that users must carefully consider.

On the other hand, self-custodial wallets prioritize security and autonomy. While the onboarding process can be more complex and time-consuming, they empower users to take full control of their funds. For those who prioritize decentralization and are willing to manage their own security, self-custody is the preferred option. Combining a hardware wallet with a self-custodial setup is the gold standard for long-term safety, even if it requires additional effort.

Ultimately, the choice between custodial and self-custodial wallets depends on individual priorities. Custodial wallets excel in simplicity and speed, while self-custody offers unparalleled control and security for those ready to embrace the responsibility.

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Together with Max Zheng , I'm writing about new trends tech especially around the latest AI and web3 apps.

About the author:

Pascal is a tech sales professional and angel investor in fintech with a particular focus on web3 and payments. He has appeared on stage at multiple global conferences such as Token 2049 in Singapore and ETH Denver. He acts as advisor for several vc firms and accelerators and teaches start-ups of any stage how to grow their sales pipelines and close more deals.