Wallets and keys
Custodial and self-custody wallets
Short answer
Ethereum wallets are applications that let you interact with your Ethereum account, and they fall into two main categories: custodial and self-custody. With self-custody wallets, you hold the private keys that grant control over your Ethereum account, and wallet providers do not have custody of your funds. Custodial wallets are linked to a centralized exchange, where you use a recoverable username and password, and you trust the exchange with custody of your funds.
What is an Ethereum wallet?
Ethereum wallets are applications that give you control over your Ethereum account. They let you view your balance and transaction history, send and receive funds, and connect to applications using your account as a login. You can swap wallet providers at any time, and many wallets let you manage multiple Ethereum accounts from one application.
Sources: ethereum.org
Self-custody wallets
Self-custody wallets are interfaces that let you interact with your Ethereum account, and you hold the private keys that control the account. These wallets come in several forms: physical hardware wallets that keep crypto offline, mobile applications, browser wallets, browser extension wallets, and desktop applications for macOS, Windows or Linux. You are responsible for keeping your private keys safe, as there is no customer support in crypto.
Sources: ethereum.org ethereum.org
Custodial wallets
Custodial wallets are linked to a centralized exchange, which connects your wallet to a username and password that you can recover in a traditional way. When you use this type of wallet, you are trusting the exchange with custody over your funds. If the exchange experiences financial trouble, your funds would be at risk.
Sources: ethereum.org
Key management and recovery
Your private key is what you use to sign transactions, and it grants you custody over the funds associated with your Ethereum account. Most wallets will often give you a seed phrase when you set up an account; this is the only way you will be able to recover your wallet. Write the seed phrase down and keep it safe, do not store it on a computer. Transactions cannot be reversed, so always take precautions when using your wallet.
Sources: ethereum.org ethereum.org
Official sources used on this page
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Questions
What is the core difference between custodial and self-custody wallets?
With self-custody wallets, you hold the private keys that control your Ethereum account, and wallet providers do not have custody of your funds. Custodial wallets are linked to a centralized exchange, where you use a recoverable username and password, and you trust the exchange with custody of your funds.
Sources: ethereum.org
Do wallet providers hold my funds?
Self-custody wallet providers do not have custody of your funds. For custodial solutions linked to centralized exchanges, you trust the exchange with custody of your funds.
Sources: ethereum.org
Can I recover a self-custody wallet if I lose my seed phrase?
The seed phrase is the only way to recover a self-custody wallet. Wallets cannot be easily recovered without it, and transactions cannot be reversed.
Sources: ethereum.org