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Exchanges should offer non-custodial wallets
Improved technology, industry trends make now the right time.
December 14, 2023
There has long been a debate between the benefits of non-custodial versus custodial wallets. Crypto exchanges and fintech companies have typically only offered their users custodial wallets to manage assets for the perceived ease of use, particularly with those new to crypto. Recent technical improvements, however, have significantly improved non-custodial wallet infrastructure and design. Given these improvements, and the unique benefits non-custodial wallets offer their customers, it is time for exchanges to consider offering them as part of their product.
The benefits of offering non-custodial wallets
While custodial wallets are the traditional offering of exchanges and regulated fintech companies, there are significant benefits for them to incorporate non-custodial wallets into their customer offering.
- Users demand more control: Recent events, such as the failure of FTX, have made users wary of giving up control of their assets to custodians. Many are more comfortable with non-custodial options that offer complete control and prevent exchanges from accessing their assets.
- Preferred by most power users: Power users tend to desire the access, control, and utility of a non-custodial wallet. Given that they can be up to 10x more profitable than the average user, meeting their needs has the potential to offer significant return on investment.
- Expand utility: Custodial wallets have limited utility, generally focused on the purchase, transfer, and management of crypto assets. With non-custodial wallets, users have a pathway to more complex and interactive activities such as gaming, lending, borrowing, swaps, and more—activity that requires users to sign and/or approve multiple transactions in a short period. Custodial wallets are less flexible as management of crypto assets are controlled by custodians.
- Grow internationally: Non-custodial products are able to launch in more markets significantly more quickly given users control access to their funds.
Many exchanges have integrated non-custodial wallets into their offerings. Recently, OKX expanded their business to Brazil by offering a web3 wallet that uses both Multi-party Computation (MPC) and Account Abstraction (AA). Not only does this non-custodial wallet offer customers access to trading, dApps, NFTs, and more, it also offers fiat on-ramps in local currency, broadening the availability of purchasing crypto in the country. Coinbase Wallet has been successful at offering customers wider access to tokens that are not available on the exchange itself, including more obscure options like Zora.
Common misconceptions about non-custodial wallets
As an emerging technology, non-custodial wallets still remain misunderstood by much of the broader web3 community. Two key misconceptions may be preventing exchanges from integrating what could be a popular offering to help them retain and grow the active users.
Misconception #1: Non-custodial wallets are prone to scams and phishing attacks.
Exchanges may worry that frequent hacks leave them open to the negative reputational consequences of users losing funds. While incompetent integrations of non-custodial wallets could have this outcome, working with a company like Portal to implement the wallets offers the correct tools to prevent these types of security breaches. For example, the Security Firewall blocks smart contract addresses that are fraudulent from user signing, helping the exchange safeguard their users while still providing a non-custodial wallet.
Some may worry a tool like Firewall constitutes censorship and impacts the non-custodial nature of the wallet. However, non-custodial comes down to whether the exchange or a third-party can access and withdraw funds from the user’s wallets without a user’s permission, which in this case is not possible by design of Portal’s TSS MPC wallet-as-a-service.
Misconception #2: Exchanges can’t monetize off transactions in non-custodial.
In fact, wallets can be profit centers for exchanges, particularly because they are favored by power users. Features like Swaps or Card Issuing allow exchanges to monetise transaction volumes. They can also explore building their own smart contract modules to take fees on user interactions or signatures with dApps.
Misconception #3: Non-custodial wallets are more difficult to use.
While some non-custodial wallets require the memorization of seed phrases or mnemoincs, recent technical advances mean it is no longer the case that non-custodial equals a bad user experience. Passkeys in particular have markedly improved the process for recovering wallets in case users lose their devices (such as phones) on which their wallets were originally kept.
Leverage Portal to add non-custodial wallets
Portal is the most composable non-custodial wallet and signing platform in the industry. With the Portal SDK, exchanges can get a non-custodial wallet option to market quickly but can add features overtime in a seamless fashion. Book a demo to explore how we can help expand your product offerings.