As the NFT space increases, the demand for wallets to store and manage them has heightened. There are two major types of NFT wallets, the custodial NFT wallet and the non-custodial NFT wallet.
Custodial NFT wallet
Custodial wallets are where a custodian is holding the private key. These wallets ensure that the digital assets stored are protected—the third-party safeguards both the assets and the user data, such as the private key. Usually, custodial NFT wallets are held by an exchange, a Marketplace, or a wallet provider.
The fact that a centralized body stores the private keys makes it easy to use, as NFT holders do not need to remember their private keys or worry about securing them. When users forget their log-in details, they can request a recovery procedure.
Custodial NFT wallets usually require their users to undergo a KYC process, removing a layer of anonymity. Another issue is that with the centralization, the exchange or marketplace may possess the power to freeze the wallet address and the digital assets that it contains. In terms of a security breach of the third party, wallets may become compromised, and hackers can divert NFTs to another wallet.
Non-custodial NFT Wallets
Another type of wallet that stores NFTs is the Non-custodial NFT wallet. The complete control of the wallet, private keys, data, and digital assets are with the user. The private key can't be accessed by a third party, meaning the user must save their seed phrases and other security log-in details. If the said details are lost, the user won't be able to access the wallet.
Non-custodial NFT wallets do not request the personal information of the user, which means there is no KYC process. As a result, your digital assets cannot be accessed by anyone.