Summary
As the decentralized finance (DeFi) ecosystem continues to grow, NFTs have gradually become a hot topic. When trading or holding NFTs/other cryptocurrency assets, you can choose to use custodial or non-custodial services. Custodial services are responsible for holding the private keys of user wallets and custodial assets. Binance NFT Market is a typical custodial NFT platform, which can be logged in by registering an account.
Non-custodial services allow users to have full control over their wallets and digital assets. Users can exchange NFTs held directly through their wallets. A market has emerged that completely skips intermediaries. Binance's non-custodial NFT platform Featured By Binance is a typical example. By minting NFTs in the blockchain, creators and fans are directly connected without any platform risk.
Introduction
Non-fungible tokens (NFTs) are in great demand across the blockchain and DeFi ecosystem. NFTs are widely discussed these days, but custody is not a hot topic. Who has full control over the NFT you just created or purchased? You may not have as much custody of your NFTs as you think.
If you’ve researched wallets and cryptocurrencies, you’ll be familiar with this concept. In fact, it’s possible to either take custody of your NFTs yourself or have someone else hold them. It all depends on your personal needs and what kind of responsibility you want to take.
The main scenario for choosing between custodial and non-custodial NFTs is choosing a wallet and a platform for trading or creating NFTs.
What is a digital currency wallet?
A cryptocurrency wallet is an essential tool for holding cryptocurrencies and interacting with the blockchain. To trade and use decentralized applications (DApps), you must have a wallet. All wallets have two major elements: a public key and a private key.
The public key of a wallet is used to generate a receiving address for cryptocurrency. The private key is cryptographically confidential and is used to sign transactions and provide access to funds. When choosing a cryptocurrency wallet, there are many options. The key can be printed on a piece of paper, accessed through desktop wallet software, or stored on a hardware wallet device.
Storing cryptocurrency is just one of the functions of a cryptocurrency wallet. If the wallet has the corresponding function, you can also store NFTs in it. You may have used a cryptocurrency wallet to send or receive digital assets such as Bitcoin (BTC), Ethereum (ETH) or stablecoins. However, some cryptocurrency wallets can also store and transfer NFTs, which are tokens issued on the blockchain.
What is a custodial cryptocurrency wallet?
Custodial cryptocurrency wallets do not allow you to have full control over your private keys. A third party, such as an exchange or custodial wallet provider, stores your assets on your behalf. You don’t have access to your private keys, but that’s not necessarily a bad thing. It all comes down to your personal needs.
The decentralized nature of blockchain technology means that if the private key is not placed properly, you will permanently lose access to your wallet. With private key custody, the relevant responsibilities can be transferred to the custody service provider. Even if you forget your trading platform password, you can log in to your account again with the help of customer service.
However, don’t forget that the third party has custody of the user’s funds in this case. Your cryptocurrency is only safe under the protection of the custodian. Therefore, it is crucial to choose a reliable exchange platform or service provider.
What is a non-custodial cryptocurrency wallet?
Non-custodial cryptocurrency wallets only provide the holder with control over the private keys. For users who want to have a deeper control over their funds, non-custodial wallets are the ideal choice.
However, as mentioned above, the responsibility for protecting the security of the key will be borne by the wallet owner. If the key is lost and the mnemonic phrase is forgotten, the wallet and the funds stored in it will be lost. There are also many types of non-custodial wallets, including apps, computer programs, and browser plug-ins. Popular products include Trust Wallet and MetaMask. You can also choose a wallet service (such as Tor.us). With such services, users can protect their keys with social login information, which effectively improves the security and convenience of operations.
Which wallets can be used for NFTs?
Both custodial and non-custodial wallets can be used to store crypto art or other NFTs. However, the wallet used must support the type of NFT being stored. NFTs can exist on different blockchains or even on the same blockchain, using a variety of token standards. Each standard has different characteristics and rules that determine how the token is created and used.
The most common token standards include:
Ethereum: ERC-721 and ERC-1155
Binance Smart Chain: BEP-721 and BEP-1155
If you plan to store your NFT in a custodial wallet (such as a cryptocurrency exchange) or a non-custodial wallet, please first check the token standard of the NFT. Based on the above information, please make sure that the wallet you use supports the blockchain and token standard corresponding to the digital artwork.
MetaMask, Trust Wallet, and MathWallet are non-custodial wallets that accept the most common NFTs. However, when interacting with centralized exchanges, custodial wallets are used. It is recommended that you check the exchange's FAQ or website for details on the NFTs it accepts.
How to buy NFTs using a wallet?
How you purchase NFT collectibles depends on two things: the type of wallet and the marketplace you want to use. If you want to have full control over your NFT purchases and store them in a non-custodial wallet, you can only use a decentralized platform (such as Featured by Binance).
Decentralized Platform (Non-custodial)
If you have used Binance DEX or other decentralized exchanges before, you may already be familiar with non-custodial systems. Decentralized exchanges do not require account creation or registration. You will generally trade directly with each party's wallet.
NFT Marketplace (Hosting)
During the purchase process, the NFT marketplace acts as a custodian. If you want to participate in the auction, you must send your funds to the platform for custodianship. After purchasing the NFT, you can deposit it into the platform's custodial wallet or transfer it to another wallet.
The Binance NFT Marketplace will also require you to transfer funds to its non-custodial spot wallet to purchase and bid on NFTs. Your Binance account must be “pre-funded” with cryptocurrency, as the site does not interact directly with external wallets.
How do I mint or sell NFTs using my wallet?
Decentralized Platform (Non-custodial)
The process of creating an NFT is called "minting". To mint an NFT, you need to connect your wallet and upload your digital assets to an NFT platform (such as Featured by Binance). Such platforms support uploading images, audio or video files, and some metadata (Introduction to NFTs). You can choose to create a single NFT or a collection, which consists of a group of NFTs.
Once minted, the asset will be stored on-chain and cannot be changed. After that, you can sell the NFT as needed. Currently, the secondary market of Featured by Binance supports two sales methods: fixed price sales and English auctions.
After the sale is successful, your NFT will be issued to the buyer. The sales proceeds will be transferred from the buyer's wallet to your wallet. The whole process is completed automatically and protected by smart contract rules.
NFT Marketplace (Hosting)
To sell your NFT on a hosted marketplace, you must deposit it on the platform you are using. Make sure the platform accepts the type of NFT you are selling. If you are not careful, you may lose your NFT by mistake by sending it to an incompatible platform. Each marketplace has different selling options, such as fixed price sales or auctions.
Once you successfully sell your NFT, the marketplace will automatically transfer it to the new owner. Your funds will be sent directly to an external wallet or remain on the platform for you to access.
The pros and cons of managed NFT services
Escrow services provide an easy way to match buyers and sellers of NFTs, which is perfect for new users. Users don’t have to worry about losing their keys, and this convenient and secure method is also suitable for experienced users. The operation interface is usually user-friendly, and the whole process is also highly fault-tolerant. If there is a problem, the platform will provide help through support services.
However, for many cryptocurrency enthusiasts who value decentralization, not being able to directly control personal assets is a huge disadvantage. Identity verification (KYC) review is also standard for some custodial NFT services, requiring users to provide their name, address and ID. In fact, stored data is always at risk of being stolen or destroyed. It is not uncommon for custodial services to be hacked.
The pros and cons of non-custodial NFT services
Non-custodial NFT platforms give users greater control over the entire transaction process. You can skip the middleman and trade NFTs directly from your wallet, significantly reducing fees and increasing privacy. However, these factors are more dependent on the network used. If you value privacy, you can skip the KYC review and participate in anonymous transactions. You only need to prepare a wallet to start your NFT journey.
There are also some disadvantages to non-custodial control. For new users who are not familiar with wallets, non-custodial wallets may not be as convenient and easy to use as custodial wallets. Fortunately, service providers such as Tor.us are simplifying Dapps and continuously improving their convenience.
As of June 2021, non-custodial exchanges have lower liquidity and volume than custodial exchanges (except for "giants" such as Uniswap). However, the NFT space is still nascent and difficult to measure by conventional standards. Even so, the determining factors of liquidity are user base and volume, and non-custodial services are likely to surpass custodial services in the near future. Other projects are developing cross-platform non-custodial markets that could potentially resolve liquidity issues.
Comparison of custodial and non-custodial NFTs
Summarize
Custodial and non-custodial options each have their own advantages, depending on your needs. If you value autonomy and security, non-custodial NFT platforms such as Featured By Binance are a great choice.
For less experienced users, using a custodial NFT marketplace and wallet may be more effective. Custody services can create more interaction time, and you don’t have to spend too much energy to master the use of the wallet. In this case, the Binance NFT marketplace is an option worth considering.