Custodial Wallets in NFT / Web3 Gaming

Hey all, another article here for the new year. This time I’m going to go over custodial wallets and their use cases in NFT / web3 gaming. I’ll try to explain it from the users standpoint and the companies standpoint with a few pros and cons.

What is a custodial wallet?

A custodial wallet for crypto or web3 is a type of digital wallet that is controlled and managed by a third-party organization, rather than the user themselves. This third-party organization, often referred to as a custodian, is responsible for managing the private keys and access to the user’s crypto assets. The easiest way to imagine this is the following.

Pretend I’m a game publisher and I want users to try my game. Currently, web3 games are a huge pain in the ass to sign up for. You need to onramp crypto, potentially bridge, sign up for a wallet, confirm transactions etc. We’re talking MAJOR friction. A custodial wallet allows a user-friendly way for users to store and manage their cryptocurrency by potentially them not even knowing. The publisher can then attract more customers and increase the adoption of cryptocurrency. In addition, a publisher doesn’t necessarily have to worry about a lot of the custodial wallet aspects if there is a 3rd party service that handles this integration. They can focus on building their game on the blockchain of their choice.

What happens to your earned NFTs or crypto on the game as a user? Is it stuck in the custodial wallet? Nope! You can generally transfer them over IF you decide to go through some of the potentially painful steps of creating a wallet, getting some crypto, confirming transactions etc. Custodial wallets should play a key adoption mechanism in the future of web3 and NFT gaming.

What are some other reasons someone may use a custodial wallet?

  1. Security: Some people may feel more secure using a custodial wallet because the custodian is responsible for securing the private keys and assets. In crypto the term goes, not your keys, not your coin. So this can DEFINITELY be seen as a negative as well. However, until further education overall happens. A potential custodial wallet for the early days can be more secure than a non secure wallet overall.
  2. They don’t know they’re playing a web3 game *shocker*.
    • Yes, that’s right. Instead of telling the world you’re a web3 game, you can use a custodial wallet to reduce overall friction and just let people get ready for the game. They don’t have to worry about gas, wallet security etc. Once they’re good and ready they can go ahead and get signed up

The cons of using a custodial wallet include:

  1. Loss of control: The user does not have full control over their assets and must rely on the custodian to manage them. In crypto / web3 gaming. Control is everything. Custodial wallets were seen very negatively early on. This is changing but some may still feel that way.
  2. Risk of hacking: If the custodian is hacked or goes out of business or is fraudulent, the user’s assets may be at risk. It’s important to weight the pros and cons of keeping assets on a custodial wallet too long
  3. Security best practices (or lackthereof): Some publishers may have VERY lax security and if they get hacked so will your wallets. Regular audits and controls / publications would be good to know about the custodial wallet for the game. Generally this isn’t revealed for a few reasons but transparency can be key here if there is a bug bounty program for the game.

Overall, custodial wallets for crypto or web3 can be a good option for people who want a convenient and user-friendly way to manage their assets, but it’s important to weigh the pros and cons and understand the risks involved before choosing a custodial wallet for both users and publishers. I think custodial wallets will be an absolutely vital tool for web3 so make sure you keep an eye on them and the companies that are building these out.

Recent Articles

Leave a Comment