When your business mints and sells non-fungible tokens (NFTS), you will do so in a marketplace. Marketplaces can be either decentralized (non-custodial) or custodial. Non-custodial marketplaces operate differently than custodial ones and often have different capabilities.
Non-custodial and custodial marketplaces also provide different types of wallets for users to store their cryptocurrency and NFTs. Every crypto wallet has a public key and a private key. The public key is the wallet's address, similar to a bank account number. The private key is similar to a PIN or password and provides security for the wallet. Depending on the marketplace, the wallet can be either custodial or non-custodial.
Understanding the different types of marketplaces can help you decide which will work best for your business and its needs.
What is a custodial marketplace?
A custodial marketplace is one where the marketplace is the host and acts as the custodian during the purchase process. For example, if an individual wants to bid in an auction, they'll need to send funds to the custodial platform ahead of time. In some custodial marketplaces, they'll also need to send funds ahead of time to buy NFTs. Likewise, if they want to sell crypto, they'll have to deposit it ahead of time.
In a custodial marketplace, the marketplace transfers the NFT or cryptocurrency to the new owner once the trade occurs. The custodial marketplace also provides support to users on the platform if they have difficulty completing their transactions. A custodial platform is often better for new users because it is more forgiving of errors.
A custodial marketplace also manages the user's crypto wallet. It has control over all the NFTs users store in the wallet and the private key. In a custodial marketplace, access is the responsibility of the host, which allows users access if they forget their key and can answer security questions correctly.
Security is also the responsibility of the custodial marketplace. Hackers have gained access to marketplaces and private keys on several occasions in the past. Discerning users will consider the reputation of the custodian when determining whether to use the marketplace.
The Binance NFT marketplace is one example of a custodial marketplace.
What are the pros and cons of hosting a custodial marketplace?
Hosting a custodial marketplace has some advantages.
- You may be able to attract new users because they will feel more comfortable with a custodial format.
- You can freeze a user's account if necessary.
- You can require that users pay specific fees for each transaction.
Hosting a custodial marketplace also has some disadvantages, however.
- You will have to comply with "Know Your Customer Regulations." The marketplace will need to collect personal information from all those who buy or sell on the marketplace before allowing them to trade. They will also be responsible for keeping that information secure.
- You have the responsibility for the security of users' private keys. If someone obtains a user's private key by hacking into your system, you could be liable for any losses they incur.
- Some experienced users will prefer a non-custodial environment because they can maintain autonomy and control.
- Users cannot conduct all types of transactions on custodial marketplaces.
What is a non-custodial marketplace?
A non-custodial marketplace is decentralized. Users make trades directly with other users and do not have to sign up beforehand. They can also trade anonymously and have complete control over their wallet at all times. A non-custodial marketplace doesn't have access to a user's private key, and the responsibility for keeping that key secure (and remembering it) lies entirely with the user.
Because they are decentralized, non-custodial marketplaces use smart contracts to enable NFT transactions. They tend to provide less support to new users and do not control the fee structure. Examples of non-custodial marketplaces are OpenSea and FeaturedByBinance
What are the pros and cons of being a non-custodial marketplace?
A non-custodial marketplace has several advantages:
- You don't have the responsibility of gathering documentation under the KYC rules.
- You are not responsible for the security of customers' private keys.
- Many experienced investors prefer the autonomy of a non-custodial marketplace and will choose that over a custodial one.
- DApps and DEX only operate on non-custodial marketplaces.
The drawbacks of hosting a non--custodial marketplace are:
- New users often find them more intimidating than custodial marketplaces.
- You can't force users to pay specific fees as easily as with a custodial marketplace.
Which type of marketplace is right for your company?
The right marketplace depends on what type of NFT you'd like to create, the transactions you'd like to support, the type of user you are seeking, and how much responsibility for security and compliance you want. Both types allow for the minting and trading of NFTs. However, if you hope to offer DApps and DEXs, you'll automatically choose a non-custodial marketplace. If, however, you don't anticipate offering these services, you have a choice.
Custodial wallets are more popular with users now, but that trend may shift. If you are primarily seeking to attract new cryptocurrency and NFT investors, you may want to develop a custodial marketplace. However, if you are looking to attract more computer-savvy, experienced investors, a non-custodial marketplace is the way to go.
We can help
Anterdit can help you launch your NFT marketplace efficiently. Our specialists can help configure it to your unique requirements and provide industry-specific services. Users will have an excellent experience with low fees and fast transaction processing times. The ease of their experience will give them good feelings about your brand.
Anterdit marketplaces are appropriate for many industries, including art galleries, music labels, sports teams, and collectibles sellers, and luxury lifestyle brands.
An Anterdit marketplace can provide its clients with:
- The ability to mint and sell NFTs on Anterdit's blockchain. NFTs can include art, sports collectibles, music, tickets, and other memorabilia.
- The ability to drive customer engagement through loyalty programs or expand the reach of your content
- The ability to create engaging campaigns and a great customer experience in the metaverse.
Contact us to view a demo today.
Binance Academy: Custodial vs. Non-Custodial NFTs: What’s the Difference?
CoinTelegraph: Custodial vs non-custodial NFTs: Key differences