NFTs are tokens that represent a digital work of art such as music, a video clip, an image, a game, an object, or a collectible. They are digital alternatives to physical works of art. However, these digital pieces of art are created with an embodiment of crypto tokens which gives them mobility in a blockchain.
Before now, artworks and rare collectibles were mostly safeguarded in auction houses and galleries. Creators and artists were usually required to pay storage and display costs. However, the safety of the art was always in question as it could be stolen or replicated. With NFTs, the digital form of a piece of artwork, the protection of the NFT artwork depends on whether they are stored in custodial or non-custodial places.
These terms—custodial and non-custodial—are commonly used in cryptocurrency discussions, but rarely in reference to NFTs. In this article, we will consider custodial and non-custodial NFTs, the storage and security options they offer, and their differences.
NFTs are not like regular tokens on the blockchain. They are meant to create scarcity in the crypto market. Due to their rare and expensive nature, it is becoming increasingly important to safely store and manage a users’ NFT portfolio.
NFTs are created and owned by individuals and institutions alike. Due to their unique nature, NFTs are only accessible to the original creator who owns the exclusive right to the NFTs unique identifier.
The right of ownership is relinquished to the new owner once it is sold. NFTs are sold in NFT marketplacess, a digital space where NFTs are minted, displayed, auctioned, bought, and sold. These marketplaces are service providers, not the owners of these NFTs, and they provide a meeting point for content creators and investors. Many NFT marketplaces have also replaced the traditional auction houses.
Custodial versus Non-Custodial
The terms custodial and non-custodial are adjectives used to describe portfolio management in the blockchain.
Custodial and non-custodial describe how blockchain exchanges are controlled. Custodial means the exchange has access to users' wallets, their private keys, and their assets to safeguard them on behalf of the user. However, custodial services are a third party that mediates between users: buyers and sellers.
Non-custodial means that a users’ account is solely used and managed by the user: their wallet, their private keys, and their assets can only be accessed and known by the user. Security is stronger in the case of non-custodial as the only person who has access to a users’ portfolio is the user.
Custodial and Non-Custodial NFTs
Currently, the custodial and non-custodial nature depends on the crypto wallet and marketplace. In the case of NFTs, and the type of security a user wants for their NFT portfolio, it is important to consider the below, and find out if they are custodial and non-custodial:
- The exchange
- The wallet
- The NFT marketplace
The Type of Exchange
To classify NFTs based on custodial or non-custodial, you have to consider if they are compatible with centralized NFT exchanges or decentralized ones. With centralized platforms, users go through a registration and verification procedure, while also providing their identity proofs to the platform.
For decentralized NFT exchanges, registration is not necessary. Decentralized platforms also allow users to deal directly with trade parties and centralized platforms serve as an escrow service, serving intermediary goals for NFTs buyers and sellers.
Some wallets give users complete control and access to their NFTs by giving full access to the wallet’s private keys. Other wallets give users access to their wallets but hold back the keys. By holding back the keys, these wallets have access to your NFTs as they are technically placed in their digital store.
You also have to consider the compatibility of your NFTs token standard to the wallet of your choice. The token standards for NFTs are mostly ERC-721 and ERC-1155 for Ethereum blockchain network and BEP-721 and BEP-1155 for Binance Chain network. These token standards are linked to whether an NFT is custodial and non-custodial.
NFT marketplaces are organized online trade centers for NFTs. Users can showcase their art, put it up for auction, and sell and buy it. Some marketplaces also allow creators to mint NFTs. Some marketplaces are custodial and some are non-custodial. It is important to know that some classes of NFTs are not accepted in certain marketplaces, especially custodial ones as they get to choose what comes in and what doesn’t. Whereas non-custodial, are more open to a variety of NFTs.
How you sell your NFTs, and who gets the money first, is determined by the management of the NFT marketplace. In some, mostly custodial, you only need to set the price or put it on auction. Whenever sales are made, the marketplace receives the payment on the user's behalf and takes a cut. The payment is then sent to the NFT artist. Non-custodial marketplaces allow you to deal directly with the buyer or seller within any third-party.
NFTs are quickly gaining popularity, especially as their use case offerings grow each day. However, it is to understand the differences between NFTs and although they belong to the same blockchain, they have different rules.
Knowing the main differences between custodial and non-custodial NFTs will help you choose how you want to secure and manage your NFT portfolio. Remember, it’s the wallet and exchange, and marketplace you need to consider in order to manage your assets as either custodial or non-custodial.