Clear DefinitionsCustodial Wallet
1 min read
Pronunciation
[kuh-stoh-dee-uhl woll-it]
Analogy
A custodial wallet is like a bank account—you trust the institution to hold and secure your funds, but you do not control the keys directly.
Definition
A wallet service where a third‑party holds and manages users’ private keys, offering convenience at the cost of counterparty risk.
Key Points Intro
Custodial wallets provide ease‑of‑use through:
Key Points
Key management: Service stores and secures private keys.
Account recovery: Platform handles password resets.
Integrated services: Built‑in exchange, staking, and lending.
Regulatory compliance: KYC/AML enforced by custodian.
Example
A user keeps Bitcoin on Coinbase; Coinbase manages the keys and executes transactions on behalf of the user.
Technical Deep Dive
Custodial services use HSM clusters to manage key pools. Customer accounts map to key shares; transaction requests are processed via multi‑sig policies. Cold and hot pools segregate funds for liquidity and security.
Security Warning
Custodian hacks or insolvency can lead to total loss; assess insurance, audits, and regulatory oversight.
Caveat
User surrenders self‑custody; limited recourse if custodian mismanages funds.
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