What Is a Decentralized Wallet

Any owner of financial resources is concerned about their reliable safety. Cryptocurrency is no exception. Before the advent of the cryptocurrency blockchain, which was first developed and launched for Bitcoin, there were only centralized, or custodial, wallets. Some cryptocurrency exchanges (Coinbase, Binance, Poloniex, Bitfinex, Kraken, Coinex), brokerage firms and online banks provide centralized wallet services. There are some advantages here, but, as it seems to us, there are significantly more disadvantages.

The problem with storing in a centralized digital wallet was storing all the information on a common server, which can in principle be hacked. The not so long history of custodial wallets and exchanges even remembers a case of theft of user funds by employees of one of the exchanges (Thodex). The company providing a centralized wallet for use can close or reorganize - such cases are also known (relaunch of the BTC-E cryptocurrency exchange). In all these cases, users' funds were not returned to them.

Another problem with a custodial wallet is its dependence on the company that provides the centralized wallet service. Regardless of the type of company – a centralized cryptocurrency exchange, a brokerage organization, an online bank – it is this platform that owns the keys to all the wallets that it provides for use. For inexperienced users, third-party control in this regard can even be useful, since if a password or other access permission is lost, the controlling company can quickly restore it.

But all the conveniences are offset by the company's ability to access your wallet. For example, the controlling platform can block an account if the activity appears suspicious or the sources of funds are questionable.

At the same time, users can contact the support service at any time, which will help quickly solve the problem and answer all questions related to the operation of the wallet and the principles of its integration with other tools of this platform.

As a rule, centralized wallets have a simple interface, they support high transaction speed and there are no fees for them within the platform.

By choosing a non-custodial or decentralized wallet, you choose complete freedom to manage your cryptocurrencies, special resources and other assets (decentralized and non-fungible tokens, etc.) without the participation of an intermediary, even if this decentralized wallet is supported by a cryptocurrency blockchain.

No individual other than the owner of the private keys, and no centralized service such as a bank or exchange, has access to a decentralized wallet. But all responsibility for storing the keys, mnemonic phrase, as well as for the safety of their assets, as well as for the transactions carried out, lies with their owner.

Key Features of Decentralized Wallets

In order to avoid making a mistake in choosing a decentralized wallet, you should know what advantages it should provide to the owner and what its main characteristics are. Only if the non-custodial wallet you have chosen meets all the properties described below, you will receive the expected benefits from using it.

Private Keys

The main difference between a decentralized wallet and a centralized one is access to private keys, which is provided exclusively to the wallet owner. A private or closed key is a cryptographic code, usually consisting of 64 characters, which is generated automatically. Only by entering the wallet using this secret key does one manage the resources stored there: crypto, decentralized applications, and various cryptocurrency tokens. Management refers to any transactions that the wallet owner makes through its interface.

In most cases, providing a private (closed) key to a decentralized wallet is accompanied by the need to add a seed phrase, or mnemonic phrase. It should be stored in a place inaccessible to outsiders. In case of loss of private keys, they can be restored only by knowing this seed-phrase.

Do not confuse the private key with the public key, which is the address of your decentralized wallet. The wallet address is not secret - it is available to everyone. But even if attackers know this public key, they will still not be able to use the funds from it, but even to establish the owner of the decentralized wallet.

The wallet address, which is the public key, is not tied to the wallet itself, it simply indicates the address in the blockchain where your tokens are located. The wallet itself is an interface for managing its contents.

No Intermediaries

A non-custodial, or decentralized, wallet allows you to conduct any permitted transactions directly with a partner or several partners, without the participation of any intermediaries and without centralized control from the exchange, bank, and even the blockchain platform itself, if you use a wallet that this ecosystem provides to its users.

Decentralization

Although a decentralized wallet can operate through a blockchain platform, it is not controlled by any company or organization, nor by the blockchain network through which it operates. The wallet user interacts directly with both the blockchain system itself and with partners through the ecosystem to which the decentralized wallet is linked.

Thanks to this decentralization, the wallet owner is not at risk of interference from an intermediary who could block the funds stored in the wallet or confiscate them under any pretext.

Anonymity and Privacy

It has already been mentioned above that there is a public key, which is the address of a decentralized wallet in the blockchain system. This is all the information about the wallet owner. That is, through this public key, the identity of the owner of the decentralized wallet cannot be revealed to any person.

Moreover, platforms that provide non-custodial wallets do not have information about the identity of the wallet owner. Since in most cases, when registering a decentralized wallet, personal data is not required.

This is one of the significant differences from custodial wallets of centralized systems, when full verification of the identity of the future owner may be required. Such centralized services usually request passport data as part of KYC compliance (Know Your Customer).

If you put all the advantages and disadvantages of centralized and decentralized wallets together in one comparative table, it will look like this.

Wallet type	Advantages	Disadvantaged
Centralized	Third party assistance in managing and maintaining the security of your wallet.	The need to collect user data when registering an account and data about his wallet.
Reliable customer support to answer your questions.	Possibility of lack of access to your crypto assets during technical work on the platform.
The ability to quickly restore access to your wallet if you have forgotten your password.	An internet connection is almost always required.
Many additional services and functions that will help simplify your wallet and protect it more reliably.	The need to go through KYC, which takes some time, since the platform will have to verify the user's identity.
Decentralized	Advantages	Disadvantages
	The user has ownership and full control over their crypto funds .	The user is solely responsible for the safety of crypto assets .
No intermediaries are required to track and manage your transactions.	In emergency situations, the user has to solve the problems himself.
Minimal risk of hacker attacks due to lack of permanent Internet connection.	If you lose your private key or forget your seed phrase, it will be impossible to restore access to your wallet.
When registering a wallet, you do not need to go through verification procedures.	The interface is difficult to understand for cryptocurrency newbies.

Compatibility with Decentralized Applications (dApps)

As we have described in previous publications, dApps are decentralized digital applications or programs based on a smart contract. Working with dApps is exclusively the prerogative of decentralized systems, such as blockchain platforms. The WalletConnect protocol allows dApps to integrate with decentralized wallets (and only with them). This provides the opportunity to use numerous functions of these applications: from entertainment to financial ones - through decentralized finance platforms DeFi. Owners of decentralized wallets through DeFi platforms can stake crypto, trade it, use loans and offer them. At the same time, the presence of intermediaries in the person of traditional exchanges and financial organizations is excluded from transactions.

WalletConnect protocol supports over 170 types of cryptocurrency decentralized wallets, including the most popular ones.

Examples of Decentralized Wallets

We have described the principles of choosing decentralized wallets, describing their properties, disadvantages and advantages. Below are several examples of popular non-custodial wallets that have proven their functionality and received recognition from the cryptocurrency community.

1. MetaMask. Perhaps the most popular decentralized wallet today, which was created to interact with the cryptocurrency blockchain Ethereum. This wallet supports not only Ethereum tokens, but also others created on their basis, for example, tokens of the Tron blockchain and other ecosystems. Available to users as a browser extension and as a mobile application. Being an intermediary between the main wallet and blockchains, where the user makes payments with crypto, it provides the owner with a key storage, a secure login, a token storage, the ability to exchange tokens, and access to decentralized applications.

2. Trust Wallet. Today, this multi-currency wallet supports 65 blockchains and more than 4.5 thousand assets of different types of cryptocurrencies, dApps (decentralized applications) and NFT (non-fungible tokens). Supports multi-currency DeFi wallets, which allow you to work with a number of different assets at the same time. Available both in a mobile version and as a browser extension.

3. Exodus. An easy-to-use desktop multi-currency non-custodial software wallet with built-in cryptocurrency exchange. Supports 364 cryptocurrencies on 50 blockchain platforms. Integrates with DeFi and Trezor hardware wallets.

Why did we specifically highlight the possibility of integrating Exodus with hardware wallets? All of the above decentralized wallets are so-called hot wallets. This means that such a wallet requires an Internet connection to conduct a transaction. The main advantage of this type of digital storage is the ability to conduct transactions with cryptocurrencies from any place where there is access to the blockchain network. Hot wallets are more mobile and convenient than cold wallets, where funds can be stored without Internet access.

But both types of wallets have their advantages and disadvantages.

Cold wallets are considered more reliable in terms of asset security, since they are usually a hardware device such as a flash drive. After all, you can store funds on such a device without Internet access, which leaves virtually no hope for hacking by intruders.

The downside to the convenience and speed of using hot wallets is that they are less secure due to the regular access to the network.

But hardware devices do not allow for ongoing transactions and trading operations, which is the focus of decentralized wallet owners.

If desired, it can be used to store part of the assets using a cold wallet if the decentralized wallet is integrated with any type of hardware wallet.

To sum it up, it should be noted that a non-custodial or decentralized wallet provides owners with the opportunity to manage their cryptocurrency assets without intermediaries, completely confidentially and safely. All control over this service is completely concentrated "in the hands" of the owner of the decentralized wallet.