Understanding Self custody
Self-custodial, non-custodial, custodial, un-hosted, hosted... What's the difference?
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Self-custodial, non-custodial, custodial, un-hosted, hosted... What's the difference?
Last updated
Was this helpful?
If you are just getting started with crypto and blockchain, one of the biggest challenges can be trying to figure out what all of the different terms and fancy words mean. If you are thinking about installing Xaman (formerly Xumm) and are wondering what exactly words like "custodial", "non-custodial", "un-hosted" "self-custody" and "hosted" refer to, this article is going to help get you up to speed.
Most people are familiar with the general idea of what a bank is and how they work. In simple terms, a bank is a business that deals with money. As a customer, you can open an account with a bank and deposit money into that account. The bank holds that money for you until you decide how you would like to use your funds.
This is an example of a "custodial" or "hosted" account. The bank created an account on their "hosted" system (on their computers which they own and operate) and agree to take "custody" of your funds when you deposit them. While your funds are in their custody, they have certain obligations and responsibilities which are, in theory, overseen by local/federal governments who are supposed to ensure that the banks act in a responsible and transparent way.
As a customer, you can open an account with a bank and deposit money into that account. The bank holds that money for you until you decide how you would like to use your funds.
This is an example of a "custodial" or "hosted" account. The bank created an account on their "hosted" system (on their computers which they own and operate) and agree to take "custody" of your funds when you deposit them.
While your funds are in their custody, they have certain obligations and responsibilities which are, in theory, overseen by local/federal governments who are supposed to ensure that the banks act in a responsible and transparent way.
Most of the time, accessing your funds is a fairly easy and straightforward process but there are several situations where a bank can decide to restrict access to your money, for example:
They suspect you of laundering money, financing terrorism, writing bad checks on your account.
If a creditor has a claim against your funds
If the government determines you owe them money (taxes, fines, penalties, etc.)
Banks can also decide who and where you can send your money to if they don't think you are making good financial decisions.
For example, a large, multinational bank in the UK informed their customers...
Source:
Fortunately, many individuals prefer their banks and governments to handle these financial decisions for them, making custodial accounts a logical choice for those who wish to have their funds managed by someone else.
When it comes to the XRP Ledger/Xahau, there are several crypto exchanges which offer custodial accounts. Similar to a bank, you can open an account with a crypto exchange and deposit money into your account with them. The exchange holds and administers that money for you and when it comes time to interact with the XRP Ledger/Xahau, they act as a "middle man" and perform transactions on your behalf.
For example, let's say a friend wanted to send you 1000 XRP. The crypto exchange would provide you with an r-address (which is an account number on the XRPL) and a destination tag. (which is your account number on the exchange's database) You would provide the r-address and the destination tag to your friend and they would send the funds to the r-address.
However, the r-address is not your r-address. It belongs to the crypto exchange. Your friend is sending the 1000 XRP to the crypto exchange's account, not to your account. You don't have an account on the XRPL. You have an account on the crypto exchange's database. The crypto exchange actually has your XRPL and puts a 1000 XRP credit your account with them. The actual XRP is in their XRPL account.
Since the exchange created an account on their "hosted" system (on their computers which they own and operate) and agree to take custody of your funds, we refer to them as custodial accounts.
This does create a potential question as to who actually owns the XRP since it is not really in your account. It is in the crypto exchange's account.
However... on the XRP Ledger, there is a second option.
One of the great features of the XRP Ledger/Xahau is that you can actually create your own account on the network. This means that you can create your own r-address and have complete control over it. It also means that you, and only you, can make decisions on how you will manage your funds. As well, you actually own and control your own XRP. We refer to this type of account on the XRP Ledger as a self-custodial account.
Self-custodial accounts on the XRPL are not controlled by banks or businesses or governments. They are completely controlled by you. Xumm helps you manage these types of accounts.
You may find that other wallets or companies refer to self-custodial accounts as "non-custodial" or "un-hosted" accounts. All three terms refer to the same type of accounts. The term self-custodial refers to an account where you have custody of your funds. This is not really obvious with the terms non-custodial and un-hosted.
Xaman is a self-custody wallet that allows you to transact directly with the XRP Ledger. It provides you with an easy way to create a new XRPL account in a safe and secure way, and helps you interact with the XRPL and manage your XRPL account(s).
