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Abstract
As the decentralized finance (DeFi) ecosystem continues to develop, NFT has gradually become a hot topic. When trading or holding NFTs/other crypto assets, you can choose to use custodial or non-custodial services. The custody service is responsible for holding the private key of the user's wallet and hosting the assets. Binance NFT Market is a typical custodial NFT platform that can be logged in by registering an account.
Non-custodial services allow users to fully control their wallets and digital assets. Users can hold NFTs directly through wallet transactions. A marketplace emerged that completely skipped intermediaries. Binance’s non-custodial NFT platform Featured By Binance is a typical example. By minting NFTs in the blockchain, creators connect directly with fans without any platform risk.
Introduction
Non-Fungible Tokens (NFT) in the entire blockchain and DeFi ecosystem There is a huge need in all of them. Today, NFTs have been widely discussed, but custody rights are not a hot topic. Who exactly has full control over the NFT you just created or purchased? You may not have as much custody rights over the NFTs you hold as you think.
If you have researched wallets and cryptocurrencies, you will no doubt be familiar with this concept. In fact, it is a feasible solution to hold NFT custody yourself or let others hold NFT. It all depends on personal needs and what level of responsibility one wants to take on.
The main scenario for choosing between custodial and non-custodial NFTs is choosing a wallet and platform for trading or creating NFTs.
What is a digital currency wallet?
Cryptocurrency wallets are essential tools for holding cryptocurrencies and interacting with the blockchain. To conduct transactions and use decentralized applications (DApps), you must prepare a wallet. All wallets have two major elements: public keys and private keys.
The wallet's public key is used to generate the receiving address for the cryptocurrency. The private key should be treated as a confidential password and its role is to sign transactions and provide access to funds. When it comes to picking a cryptocurrency wallet, there are a variety of products to choose from. Keys can be printed on a piece of paper, accessed through desktop wallet software, or stored on a hardware wallet device.
Storing cryptocurrency is only one of the functions of a cryptocurrency wallet. If the wallet has corresponding functions, you can also deposit NFT into 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 in the blockchain.
What is a custodial cryptocurrency wallet?
Custodial cryptocurrency wallets do not support full control of personal private keys. A third party (such as an exchange or custodial wallet service provider) will store assets on behalf of the user. You can't access the private key yourself, but that's not necessarily a bad thing. Everything depends on individual needs.
The decentralized nature of blockchain technology determines that if the private key is improperly placed, you will permanently lose access to your wallet. Through private key escrow, the relevant responsibilities can be transferred to the escrow service provider. Even if you forget your trading platform password, you can log in to your account again with the help of customer service staff.
However, don’t forget that the third party has custody of user funds in this case. Your cryptocurrencies are only safe if they are protected by your custodian. Therefore, it is crucial to choose a reliable trading platform or service provider.
What is a non-custodial cryptocurrency wallet?
Non-custodial cryptocurrency wallets only provide the holder with control over their private keys. Non-custodial wallets are ideal for users who want deep control over their funds.
However, as mentioned previously, the responsibility for keeping keys secure will rest with the wallet owner. If the key is lost and the mnemonic phrase is accidentally forgotten, the wallet and the funds stored 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 the help of such services, users can protect keys through social login information, effectively improving the security and convenience of operations.
Which wallets can be used for NFT?
Both custodial and non-custodial wallets can be used to store cryptocurrency art or other NFTs. However, the wallet used must support the type of NFT to be deposited. NFT can exist in different blockchains, or even in the same blockchain, and can use a variety of token standards. Each standard has different features and rules that determine how tokens are created and used.
The most common token standards include:
Ethereum: ERC-721 and ERC-1155
Binance Smart Chain: BEP-721 vs. BEP-1155
If you plan to store NFTs in a custodial wallet (such as a cryptocurrency exchange) or a non-custodial wallet Wallet, please check the token standard of NFT first. Based on the above information, please ensure that the wallet you use supports the blockchain and token standards corresponding to the digital artwork.
MetaMask, Trust Wallet and MathWallet are non-custodial wallets that can receive the most common NFTs. However, when interacting with centralized exchanges, custodial wallets are used. It is recommended that you check the trading platform's FAQ or website to learn more about the NFTs it accepts.
How to use wallet to purchase NFT?
How to purchase NFT collectibles depends on two things: the type of wallet and the marketplace platform 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 platforms before ized trading platform, you may already be very familiar with non-custodial systems. The decentralized trading platform does not require account creation or registration. You will typically trade directly with each party's wallet.
NFT Market (Custody)
During the purchase process, the NFT Market plays the role of custodian. If you want to participate in the auction bidding, you must send funds to the platform for escrow. After purchasing an NFT, you can deposit it into the platform's custodial wallet or transfer it to another wallet.
The Binance NFT Marketplace also requires 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 website does not interact directly with external wallets.
How to mint or sell NFT using wallet?
Decentralized platform (non-custodial)
The process of creating NFT is called "minting". To mint NFTs, 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 (NFT introduction). You can choose to create a single NFT or a collection, which is a collection of NFTs.
After minting is completed, the assets will be stored on the chain and cannot be changed. Thereafter, you can sell the NFT if you wish. Currently, Featured by Binance’s secondary market supports two sales methods: fixed-price sales and English auctions.
After the sale is successful, your NFT will be released to the buyer. Sales proceeds will be transferred from the buyer's wallet to your wallet. The entire process is automated and protected by smart contract rules.
NFT Market (Custody)
If you want to sell NFT in the custodial market, you must deposit it into the platform you are using. Please make sure the platform accepts the type of NFT you will be selling. If you are not careful and send the NFT to an incompatible platform by mistake, it may be lost. Each market has different selling options, such as fixed-price sales or auctions.
After successfully selling an NFT, the market will automatically transfer it to the new owner. Your funds will be sent directly to an external wallet or left on the platform for withdrawal.
Pros and cons of custodial NFT services
Customized services Provides a simple way to match NFT buyers and sellers, which is ideal for new users to get started. 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 usually adopts humanized design, and the entire process is also highly fault-tolerant. If a problem arises, the platform provides assistance through support services.
However, for many cryptocurrency enthusiasts who value decentralization, the lack of direct control over 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. Hosting services being hacked is nothing new.
Pros and cons of non-custodial NFT services
The non-custodial NFT platform empowers users throughout the transaction process Greater control. 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.
Unmanaged control also has some disadvantages. 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 constantly improving their convenience.
As of June 2021, the liquidity and trading volume of non-custodial trading platforms are lower than those of custodial trading platforms (except for "giants" such as Uniswap). However, the NFT field is just emerging and difficult to measure by conventional standards. Even so, the decisive factors for liquidity are user base and volume, and it is highly likely that non-custodial services will surpass custodial services in the near future. Other projects are developing cross-platform non-custodial markets that promise to resolve liquidity issues.
Comparison of custodial and non-custodial NFTs
Customized NFT service | Non-custodial NFT Services | |
Private Keys | Third Party Ownership | Wallet holder ownership |
Accessibility | Register an account | Open to everyone |
Transaction costs | Usually higher | Usually lower |
Security | Usually lower | Usually higher |
Support | Usually higher | Usually Lower |
Identity Verification (KYC) | Yes | No |
Summary
Both managed and unmanaged options have their own advantages depending on individual needs. If you value autonomy and security, non-custodial NFT platforms like Featured By Binance are an excellent choice.
For less experienced users, it may be more effective to use custodial NFT markets and wallets. Escrow services create more interaction time and you don’t have to expend too much energy on learning how to use the wallet. In this case, the Binance NFT Market is an option worth considering.