Robinhood Introduces New Non-Custodial Crypto Wallet for 10,000 Users

What's the difference between a Custodial vs a Non-Custodial Wallet?

Let's first by clarifying the difference between a custodial vs a non-custodial wallet. In essence, it has to do with private keys that are associated to digital wallets. This private key enables crypto owners to perform transactions from their digital wallets. A Custodial digital wallet is where the digital wallet service provider (like Coinbase or Kraken) hold on to the private key on behalf of the user. 

A non-custodial digital wallet is where the users holds the private key and is responsible for protecting their assets and proving ownership of the funds. This decision of custodial vs non-custodial wallets is done upon the purchase of the cryptocurrency by the user. There are pros and cons to both, primary have to do with security. The custodial wallets may be considered less secure as if an exchange or provider is hacked, the primary keys are compromised. With non-custodial wallets, if the user loses the private key, users could lose access to the funds.

What is Robinhood doing then?

Robinhood is rolling out a beta version of its non-custodial crypto wallet to 10,000 beta customers - which was announced in Q2 '22. The product is called Robinhood Wallet and will be the company’s first internationally-available app. The offering will be done with Polygon, a popular layer-two blockchain that plugs into Ethereum and makes the network faster and cheaper to use. The beta users will be able to purchase the Polygon MATIC token on Robinhood’s main exchange app and transfer it to their Robinhood provided wallet. 

Additionally, beta users will be able to fund their wallets using USDC stablecoin tokens, trade and swap crypto and connect to dApps to earn yield, according to the company. Furthermore, users will also be able to access dApps directly on the Polygon network, including DeFi apps such as Uniswap, Balancer and Kyberswap, and metaverse games such as Decentraland.

Aren't Gas* or Transaction Fees Too High for a Blockchain Network?

*Gas or Transaction Fees, are transaction fees done on the blockchain network. Similar to a standard financial institution, every transaction has a different cost associated to it. In the blockchain world, many computers are using electricity to compute and verify transactions taking place. The fees are compensation to users, who provide the compute power to run and validate the transactions.

The value-add or differentiator according to Robinhood is that, it won’t charge Robinhood Wallet users network or gas fees for transactions, differentiating it from popular non-custodial wallets such as Metamask and Coinbase Wallet. 

Seong Seog Lee, Robinhood crypto product manager has stated that gasless swap feature is, “an important step in lowering the friction for users to get started doing on-chain things.”

One of the reasons that Robinhood can probably forego the gas fees, is that Ethereum recently has gone through a merge, where it has switched from Proof-Of-Wor (PoW) to Proof-Of-Stake (PoS). This change will reduce Ethereum overhead by approximately 99%. Another reason for low or no cost, is due to partnership with Polygon, which uses "Layer 2" solution for processing transactions built on top of an existing blockchain. The goal with a layer 2 solution is to increase transaction speed and reduce costs by “rolling up” work before recording it on the primary blockchain.

Does Robinhood offer a Custodial Wallet and What's Next?

Yes it does - Robinhood rolled out a custodial crypto wallet to its users earlier this year and says it plans to complete a full rollout of the non-custodial wallet to 1 million+ users on the waitlist after the beta is complete, sometime before the end of 2022. 

According to Lee, the next steps for the Product Team is to build out multi-chain support for the wallet beyond the Polygon ecosystem. “I think there are two or three main considerations [around going multi-chain], Lee said. “The first is, we do want to get this initial wallet out into the world and see what user feedback is like. I think the demand for multi-chain is something that we’re going to keep at the forefront if a lot of users are asking for it … I think number two is, if we think that going multi-chain ends up delivering a better, more liquid decentralized trading experience, that’s also something that will prompt us to go multi-chain. And the third is, in the future, as we look into use cases like NFTs, we think multi-chain might be a great, great way to achieve that goal.”