Custodial Exchanges vs Non-custodial exchanges

[Cryptotrajder]

Decentralization is the most important part of blockchain technology. Unfortunately, even though it has been upgrading all the time it still meets obstacles with security.

Every person, who keeps coins on a private wallet instead of exchange is afraid of losing them. If it happens there is no way to restore them and the user loses access to every fund that was stored there.

On the other hand, if you keep your coins/funds/money on the exchange you don't have access to your private keys. The wallet is under full control of the exchange and people who manage it.
And as my grandma used to say “ Not your keys, not your bitcoins”

Exchanges, where users don’t have access to their private keys, are called “Custodial”

As the results of such a solution, we now have witnessed several hacker attacks on exchanges that cost people money. It also opened a backdoor for market manipulation(Exchange has access to their users coins/funds and may affect the price and the market).

Custodial exchanges
As I mentioned before, Custodial does not give access to private keys.
But…
It gives you a big advantage - you can restore access to your account in case of losing the password.
Also, it is comfortable in trading, your coins and funds are in one place which is easy to manage.
Yet… when the exchange goes bye bye (under), your funds go bye bye as well.

And here comes another important rule “ DO NOT KEEP YOUR COINS ON THE EXCHANGE”!


Non-custodial Exchanges
Non-custodial wallets give you full control over your funds. The owner of the wallet is the only person who has access to his private keys and funds on the wallet and the exchange has only permission to use it when you trade. Your funds are safe but this system has issues, if you lose access to your wallet (lost password, deleted security files, destroyed phone) you will never get them back. That’s why it is so important to keep your private keys in a secure place.


Currently, 90%, (if not more) exchanges, are based on Custodial technology, which everyone probably knows. In my opinion, exchanges such as Binance, Bitbay, Bitmex etc. still can be robbed, and are unable to ensure the protection of users' data, will be a thing of the past.
In their places will come new exchanges who provide the “non-custodial technology) and ensure security .

What’s your opinion guys? What exchanges are you using? Feel free to discuss this topic

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[The Sceptical Chymist]

I'm not really concerned about those private keys when I use an exchange, because I never plan on keeping my coins there--and you're absolutely correct; nobody should be keeping significant amounts of crypto on any custodial exchange.  That's something every newcomer to crypto should learn, but unfortunately some of them have to learn the hard way.  There was just a thread the other day about some Asian exchange called FCoin that supposedly pulled an exit scam, and that's the big danger.

Also, I don't have a problem with those traditional, custodial exchanges as long as they're trustworthy, and some are.  Coinbase, Kraken, Binance, and a few others are regulated and probably aren't going to get away with exit scamming even if they were inclined to do so.  And even though I still wouldn't store my crypto on any of those, I would feel comfortable trading with them and leaving coins there perhaps overnight.

Noncustodial wallets are just stupid, and nobody should be using them.  That's another thing newbies need to learn early on.

[avikz]

Nothing is flawless in this world. The way custodial exchange are beneficial for the traders, in a similar way, non-custodial exchanges have their own loopholes. Probably, it will be perfected over a period of time but right at this moment it's difficult to operate even for a seasoned trader. The user-experiace needs to be simplified first to get attention of the mass. The matter of fact, the usage of non-custodial exchange is shrinking. Read below,

https://www.theblockcrypto.com/linked/52698/total-volume-on-non-custodial-crypto-exchanges-hit-9-month-low-in-december

Not really sure what will happen in future. But at this moment, non-custodial exchanges have not been able to become an worthy competitor of custodial exchanges!

[o_e_l_e_o]

Every person, who keeps coins on a private wallet instead of exchange is afraid of losing them. If it happens there is no way to restore them and the user loses access to every fund that was stored there.

Have you never heard of back ups or seed phrases? The entire point of hierarchical deterministic wallets is that they are easy and straightforward to back up. I don't let a third party hold a single satoshi for me, and I have never been afraid of losing my coins. Every piece of technology I own could break and my house could burn down, and I'd still have easy access to all my bitcoin if I needed it. You might want to have a read of the following page: https://en.bitcoin.it/wiki/Seed_phrase

The risks of letting a third party store your coins - theft, hacks, phishing, poor security, hardware failure, exit scams, locked and frozen accounts, confiscated coins, surprise KYC, insolvency, their back up procedures, the list goes on - far outweighs the risks of storing your coins securely yourself.

[stomachgrowls]

I'm not really concerned about those private keys when I use an exchange, because I never plan on keeping my coins there-

Have the same behavior when it comes on using custodial exchanges where i dont really mind too much yet im not really storing up some chunks of coins in my account.

Even though i would spend out actively on fees from time to time on making such transfers at least i do know that im lessening the risk.Im aint saying i dont have trust to those

top exchangers we do have now but its better to be that too cautious than letting yourself too confident on storing it up for long time.Well, we know  the difference among the two
it will just matter on choice though but custodial ones are much better imho.

[LeGaulois]

You should also mention a big difference between both, a point that still makes the majority of users using custodial exchanges:

The trading volume and deposit/withdrawal fiat currency: You don't need to wait to see your order filled and the trades are done off-chain, saving time and money. You don't have to worry because you'll receive a bank transfer from an unknown bank account (and to wonder if the bank account isn't hacked, if the funds are legal, etc).
These kinds of platforms are convenient for day traders. It's fine to store some coins on a CEX, you just need to balance between your uses and accepted risks

There are several types of non-custodial exchanges by the way and not all of them are decentralized. You can see some non-custodial exchanges centralized

non-custodial ≠ decentralization

[Cryptotrajder]

Noncustodial wallets are just stupid, and nobody should be using them.  That's another thing newbies need to learn early on.

You mean only wallets or exchanges? I do not think they are stupid for many reasons. Provide you security, control over your funds and their exchanges can't disappear in any minute. If it comes to trading it's not that much different from custody exchanges, it depends on the exchange.

Nothing is flawless in this world. The way custodial exchange are beneficial for the traders, in a similar way, non-custodial exchanges have their own loopholes. Probably, it will be perfected over a period of time but right at this moment it's difficult to operate even for a seasoned trader. The user-experiace needs to be simplified first to get attention of the mass. The matter of fact, the usage of non-custodial exchange is shrinking. Read below,

https://www.theblockcrypto.com/linked/52698/total-volume-on-non-custodial-crypto-exchanges-hit-9-month-low-in-december

Not really sure what will happen in future. But at this moment, non-custodial exchanges have not been able to become an worthy competitor of custodial exchanges!

They have not been able because they are unknown, and people relly on well-known exchanges. Even tho they are hacked from time to time and people lose money.


In these days non-custodial exchanges are associated with a slowness which is no longer true. Many non-custodial exchanges came up with idea of a daily settlement destroying the stereotyp of slow funds transfer. In this way you have fast exchange, with high security

[squatz1]

I'm not really concerned about those private keys when I use an exchange, because I never plan on keeping my coins there--and you're absolutely correct; nobody should be keeping significant amounts of crypto on any custodial exchange.  That's something every newcomer to crypto should learn, but unfortunately some of them have to learn the hard way.  There was just a thread the other day about some Asian exchange called FCoin that supposedly pulled an exit scam, and that's the big danger.

Also, I don't have a problem with those traditional, custodial exchanges as long as they're trustworthy, and some are.  Coinbase, Kraken, Binance, and a few others are regulated and probably aren't going to get away with exit scamming even if they were inclined to do so.  And even though I still wouldn't store my crypto on any of those, I would feel comfortable trading with them and leaving coins there perhaps overnight.

Noncustodial wallets are just stupid, and nobody should be using them.  That's another thing newbies need to learn early on.

This is the thing that a lot of the 'not your keys, not your coins' people don't understand. If you take a good amount of precautions -- only using reputable exchanges that have set aside some money to ensure that your money is INSURED and companies that are greatly regulated and licensed, and ensuring to withdraw from the site ASAP-- you're truly going to bring the risk of you losing money down to such a low number its disgusting.

If you use scammy exchanges, you get scammed. That's how the wild west works. But if you take precautions, you limit the chance of being scammed. Think for a second, if Coinbase and Gemini both exit scammed right now, what do you think would happen to the crypto market? I can tell you what would happen, it would crash beyond belief. But then the lawsuits would start and the money would (probably) be clawed back.

[Ucy]

Nice one.
The non-custodial exchanges still have some disadvantages though. Censorship resistant, privacy, trustless/permissionless transaction, etc not guaranteed. They are however better than centralized custodial exchanges. I think decentralized exchanges/wallets can provide most of the features of non-custodial centralized exchanges.

[BlacksmithCorporation]

I have read many of the same topics as yours, but I think that decentralized exchanges that can replace centralized exchanges take a very long time. Moreover, large exchanges like Binance have funds to compensate users if the exchange is hacked, so I have no reason not to use them at the moment.

[abel1337]

Most of the exchange that is existing is a custodial exchange and traders don't bother that in the sense that they use their most trusted exchange. Trusting the exchange means giving a good service and excellent security that no one would able to bypass the security. The custodial and non-Custodial exchange has both disadvantages. It will depend on the traders where they would fit and see the advantages suits their style.

[DdmrDdmr]

<…>

Quick lateral question here: Is the OP really written by you?

On the Spanish forum there is a post that is an exact translation, that states that the source is a third party forum. A couple of days ago, another user posted the exact same content in Bitcoin Discussion, but swapped the gender of the grandparent to grandpa. This latter post was deleted, so I’ve maned to retrieve the content using @LoyceV’s archival data, but not the date of publication (24/02/2020 if I’m right, since it’s when I spotted it and I posted right after the OP – thread was deleted).

Can you shed some light here on this?

Spanish thread: https://bitcointalk.org/index.php?topic=5227468.msg53882928#msg53882928

Other version (now deleted):
Source: http://loyce.club/archive/posts/5390/53902952.html
User: btcto200k
Archive: http://archive.ph/8Olk0

[squatz1]

<…>

Quick lateral question here: Is the OP really written by you?

On the Spanish forum there is a post that is an exact translation, that states that the source is a third party forum. A couple of days ago, another user posted the exact same content in Bitcoin Discussion, but swapped the gender of the grandparent to grandpa. This latter post was deleted, so I’ve maned to retrieve the content using @LoyceV’s archival data, but not the date of publication (24/02/2020 if I’m right, since it’s when I spotted it and I posted right after the OP – thread was deleted).

Can you shed some light here on this?

Spanish thread: https://bitcointalk.org/index.php?topic=5227468.msg53882928#msg53882928

Other version (now deleted):
Source: http://loyce.club/archive/posts/5390/53902952.html
User: btcto200k
Archive: http://archive.ph/8Olk0

'
Oooh, someone got caught plagiarizing. That's a FAT ban -- unless it was you writing on an alt, or if you properly sources.

+Merit for finding this info.