The terms Self-Custody, Custodial, Non-Custodial, and others alike are casually thrown around in the industry by different products and protocols, leading to misunderstandings and a subsequent erosion of trust. It's high time we address and rectify this issue.

Although terminology aids in streamlining discussions, it can also pave the way for potential abuses, especially if the definitions are not watertight. This is because such ambiguities inevitably impact the trust and expectations of Web3 users.

Web3 gaming, like other verticals, is suffering from the lack of clarification of both terms, and thus we need a better explanation.

## The custodial vs self-custodial comparison falls short

Starting from the beginning, in crypto, there is a clear distinction between custodial, non-custodial, and self-custodial:

1. Custodial wallets are managed by a third-party organization, which takes custody of the private keys instead of the crypto owner. This makes them more user-friendly and convenient, as users don't have to worry about managing their private keys. However, this also means that users have to trust the third-party provider with their funds and private keys, which can be a security concern.

2. Non-Custodial wallets, where the private key is stored in an external database, but can never be executed unless the user authorizes. Unlike custodial solutions, users have more control over their assets, but they still need to trust the third-party provider to some extent.

3. Self-custodial wallets, on the other hand, give users full ownership of their cryptocurrency and control over their private keys. This provides a higher level of security, as users are responsible for safeguarding their own funds and keys. However, self-custodial wallets may lack recovery options in case users lose their password.

When considering wallets, games face a trilemma: Ease of use, security, and interoperability. Custodial wallets may be a better choice for users who prioritize convenience and backup recovery options, while self-custodial wallets are more suitable for those who want full control and security over their funds.

![SessionKeysExample (3).svg](https://strapi-oube.onrender.com/uploads/Session_Keys_Example_3_7b981920ba.svg)

Our industry has come a long way since seed phrases to sophisticated designs around custody. While self-custody and non-custodial are at the higher end of empowerment and innovation, the truth is that each game will choose and implement a solution that fits their game's experience. 

>All cryptocurrency wallets function through the use of both public and private keys. 
>
>The public keys are the public addresses that allow other users to find and interact or transact with your blockchain address. 
>
>The private keys are not visible to the public but are privately linked to your blockchain address. Custodial and non-custodial wallets are different applications of private key management.

In the near past, the decision to be custodial or self-custodial had huge implication -user experience, network effects, etc.- Today the technology around wallet has improved to a point that we can standardize the tools no matter the type of wallet. Before understanding how, let's quickly look at each type of wallet and explore the different tradeoffs exist today:

### Custodial Wallets
- Ownership and transaction control: In a custodial wallet, the service provider has complete control over the user's assets. The user does not have direct access to their private keys and is dependent on the provider for transactions.
- Recovery: The recovery process is managed by the service provider. If a user loses access to their wallet, the service provider has the responsibility to restore it.
- Security: Custodial wallets are generally more user-friendly and convenient, as users don't have to worry about managing their private keys. However, this comes at the cost of control and trust in the provider.
### Non-Custodial Wallets 
- Ownership and transaction control: In a non-custodial wallet, the user has control over their assets, but the provider still plays a role in managing the wallet. The user has more freedom and less reliance on the provider. Technologies like Multi-Party Computation (MPC) and multi-signature setups can be used to distribute control over transactions.
- Recovery: The recovery process in non-custodial wallets often involves shared responsibility between the user and the provider. With MPCs your key is shared across a network of nodes and can be restored as long as the network is alive and decentralized. With multi-sigs, you can restore the ownership with a network of peers having a signature of your smart contract wallet. 
- Security: Non-custodial wallets offer a balance between control and convenience. Users have more control over their assets, but they still need to trust the provider to some extent. 
### Self-Custodial Wallets
- Ownership and transaction control: In a self-custodial wallet, the user has complete control over their assets. They are responsible for managing their private keys and securing their assets. The user has full control over transactions and does not rely on a provider. Multi-sigs type of wallets can also be entirely self-custodial if the signature exists as a whole and are distributed.
- Recovery: The user is entirely responsible for the recovery of their wallet. If they lose their private key, there is no way to recover their assets. The user needs to ensure they have a secure backup of their private key. Locally stored keys have the risk of being lost or stolen, but multi-sig you can be social recovery via distributed group of friends or families holding your private keys. 
- Security: Self-custodial wallets offer the most control and freedom, but also require the most responsibility for security. They may lack some of the user-friendly features of custodial and non-custodial wallets, but they offer the highest level of control over one's assets.

Lately, the debate about the type of custodianship is becoming less of an issue, considering all the rest variables being equal (i.e. not considering legal implications). At risk of dispersing the player experience with different wallet setups, with the power of account abstraction we can actually offer a standardize experience being a custodial wallet than a self-custodial wallet. 

## Account Abstraction: The Superior Approach for Feature Parity

Traditionally, the wallet shortcomings between custodial and self-custodial were clear. But with the newest implementation of Account Abstraction, most of the not so friendly features are being blurred and solved to provide a smooth non custodial experience. 

Non-custodial wallets are gaining traction through the advent of account abstraction (AA) and its benefits in the EVM space. Leveraging AA and features like social login/recovery and game interoperability could make non-custodial wallets the safest and most feature-rich option for the future of Web3 gaming.

This means that smart contract wallets can deal with gas and transactions in highly flexible ways, making it possible to build amazing UX with account abstraction. Yes, no more wallet trilemna!


|                                                                             | Custodial accounts   |  Non-custodial externally owned accounts (EOA) |  Non-custodial smart contract accounts (SCA) | Non-custodial with account abstraction (AA) |
|-----------------------------------------------------------------------------|----------------------|------------------------------------------------|----------------------------------------------|---------------------------------------------|
| User owns & manages funds/assets                                            | ❌                    | ✅                                              | ✅                                            | ✅                                           |
| Privacy-oriented (no. KYC)                                                  | ❌                    | ✅                                              | ✅                                            | ✅                                           |
| Account / Social recovery                                                   | ✅                    | ❌                                              | ✅                                            | ✅                                           |
| Security model: sophisticated (e.g. 2FA, MPC) and/ or hybrid (e.g.multisig) | ✅                    | ❌                                              | ✅                                            | ✅                                           |
| Batched transactions                                                        | ✅                    | ❌                                              | ✅                                            | ✅                                           |
| Game compatibility                                                          | ❌                    | ✅                                              | ✅                                            | ✅                                           |
| Transfer of Ownership                                                       | ⚠️ Exposing private key | ⚠️ Exposing private key                           | ✅                                            | ✅                                           |
| Open-sourced                                                       | ❌                    | ✅                                             | ⚠️ Propietary infra                                           | ✅                                           |
| Gas sponsorship                                                             | ✅                    | ❌                                              | ⚠️ Private relayers                                            | ✅                                           |

### Custodial Wallets: Legal Hurdles in Global Gaming
The biggest consequence of integrating with a custodial wallet solution is the lack of legal clarity paired with the different jurisdictions that apply to the users. Looking at the biggest regions for gaming: 

- United States

In the US, custodial wallet providers are subject to regulations such as Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements. This means that users of custodial wallets are required to provide identification documents, such as a driver's license or passport, to comply with these regulations. The US Treasury Department has also proposed rules that could apply to certain transactions made from cryptocurrency wallets, although these rules have not yet been finalized.

- Europe

In the European Union, the European Parliament's Committee on Economic and Monetary Affairs (ECON) has approved provisions to restrict Virtual Asset Service Providers (VASPs) from transacting with unhosted wallets without verifying their owners' identities beforehand. This means that crypto exchanges would need to collect and share data about the individual owners of non-custodial wallets associated with the exchange. However, the proposal does not mean a total ban on non-custodial wallets in the European Union, as peer-to-peer transactions will still be allowed between individuals or entities.

- Asia

In Asia, cryptocurrency regulations are inconsistent across countries. For example, in Singapore, Virtual Asset Service Providers (VASPs) must have a physical location in the country and comply with AML/CFT requirements. In Thailand, the Securities and Exchange Commission (SEC) has introduced new rules for crypto custody services, requiring virtual asset service providers to establish a digital wallet management system to guarantee efficient custody. The Thai SEC also requires crypto custodians to have policies and procedures for designing, developing, and managing digital wallets and keys, as well as a contingency plan in case of unforeseen events.

## Which Tech Should You Choose?
When choosing between custodial and non-custodial gaming wallets, consider your needs for security, control, user experience, and personal preferences.

For gaming beginners, a custodial wallet might sound like the comfortable option in the short term. However, if you wish to bet in the long term usability of your game assets as well as avoiding legal paperwork, you might want to offer progressive self-custody.

At [Openfort](https://openfort.xyz), we believe the best approach is having a flexible ownership model that offers a standardized player experience across the different types of ownership models. That’s why we’re doubling down on concepts like session keys and smart accounts, allowing players to rotate from custodial to non-custodial without compromising on the developer and player experience. 

If you have more questions/ideas/queries, join our [Developer Discord](https://discord.com/invite/t7x7hwkJF4) and let us know there. Furthermore, you can follow us on [Twitter](https://twitter.com/openfortxyz) for our updates as we keep shipping.

When it comes to choosing between custodial and non-custodial wallets for gaming, there are several factors to consider. Both types of wallets have their own sets of benefits and limitations, and the choice depends on your preferences and priorities.

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Custody for Web3 Gaming

There are many opportunities that new models like "free-to-own" and "play-to-earn" models can offer, but currently, most of the available projects simply don't live up to their legacy counterparts. This has led to many doubting that this new generation of games can penetrate mainstream interest. However, this may be short-sighted. It's not the first time that a new technology has been dismissed based on its earliest examples.

Web3 games incorporate blockchain elements, including smart contracts and non-fungible tokens (NFTs), to create virtual assets that can be verifiably owned and traded by players without the intervention of a third party. This innovation puts a high degree of power back into players' hands.

## Early productions don't define the future potential

While many Web3 titles have failed to galvanize their fanbase without their once-lucrative financial boons, this has led to many detractors of the blockchain gaming genre who assume that current offerings are the zenith of what's possible, with the sector dismissed as a fad. However, looking at the recent past -particularly the monolithic rise of mobile gaming- demonstrates that the earliest products should not define future potential.

The classic game Snake was among the most popular early mobile titles when Nokia ported it to its line of mobile phones, with millions playing worldwide. At that point in history, anybody using their phone for gaming could only be called a casual gamer, and a similar story emerged as what we are seeing today.

There are many parallels between the rise of mobile gaming and what we see now. What killer apps may break open the scene to a larger audience remains to be seen, but in 10 years, it's likely that these types of titles will simply exist alongside their home console and mobile brethren.

## How "Blockchain Gaming" got started

![Diagrams.png](https://blog-cms.openfort.xyz/uploads/Diagrams_fd6303fa69.png)

From Kryptokitties and their lack of user engagement (despite having breeding capacity) to P2E with Axie, onboarding thousands of new players to the upcoming third generation of games will start bringing in the larger mainstream gaming community as production value increasingly aligns with traditional AAA games (together with the economic incentives that come with play-to-earn).

The third generation of games is here with the next level free-to-own. Free-to-play started because of piracy. It was a first step to distribution, engagement, etc. then you start monetizing by buying upgrades and items, etc. and finally you are locked in the system with assets you don't really own. 

The next evolution, proposed by [Gabriel Leydon](https://twitter.com/gabrielleydon) is free-to-own, which is free with a step further. It's not only free to play, but you can also own items that have value even before playing the game. Essentially, this extracts the items that everyone is already paying for, with $120B of items sold every year on mobile phones alone. 

## Evolution beyond free-to-play and ownership of in-game items

Players are incentivized to own the item, so they now own the item and can develop further value to it. Essentially, this democratises the free-to-play economy and gives it out for free.

But why stop here? Because of the crypto programmability, you can do pretty much anything with payments, new token types, new timeframes, variables, etc. It's a mistake to look at today's state of crypto and think that's the only thing we'll be able to do. It's an imagination problem.

The world we're going to is not limited to digital land availability, but rather 3M NFTs given out for free to 3M different wallets. What will be the intrinsic value of these NFTs? Probably zero! (everyone is going to have one for free!), but the most successful ones will be the most desired ones despite the fact that there are millions of them.

Virtual items cost literally zero to create, why wouldn't you just give this for free? Attention is the ultimate currency! People expect they'll need some token to buy some stuff, but actually, they'll get something for free and eventually move to crypto. That's the most probable end-game.

This article explores the potential of Web3 games, which incorporate blockchain elements such as smart contracts and NFTs, to disrupt the traditional gaming industry. It challenges the assumption that current offerings are the zenith of what's possible, drawing parallels with the early days of mobile gaming.

📜 Blog

Custody for Web3 Gaming

The Future of Games: Beyond Early Examples and the Rise of New Models