Non-Custodial – Explanation:
Definition: Non-custodial refers to a financial service or transaction system in the blockchain and cryptocurrency domain, where the custody or control of assets remains solely with the owner, without the need for third-party intermediaries.
Trustless Smart Contracts: Non-custodial systems operate through trustless smart contracts, which are self-executing and tamper-proof pieces of code on the blockchain. These contracts facilitate, verify, or enforce the terms of transactions without relying on central authorities.
Decentralization: In contrast to custodial services, non-custodial solutions are decentralized and do not involve intermediaries. This decentralization minimizes risks associated with censorship, confiscation, downtime, insolvency, and extended processing times.
Examples: Non-custodial services encompass a range of blockchain applications, including decentralized exchanges (DEXes) such as Uniswap and Binance Dex, lending/borrowing platforms like Maker and Compound, stablecoins like DAI, digital asset management services such as yearn.finance, and non-custodial wallet solutions like TrustWallet and hardware wallets like Ledger Nano.
Security and Recovery: Custodial services offer advantages in terms of asset recovery and security, often providing insurance against theft or malicious activities. Non-custodial services involve smart contract risk, as vulnerabilities in the code may be exploited for theft. Additionally, losing access to non-custodial accounts, including private keys, can result in irreversible fund loss.
AML Regulations: Increasing anti-money laundering (AML) regulations, exemplified by the FATF Travel Rule, are prompting users to explore non-custodial solutions to maintain anonymity, given the regulatory scrutiny on custodial cryptocurrency service providers.