Lightning wallets: custodial vs self-custodial, and how to pick one

Every Lightning wallet falls into one of two groups. Knowing which one you have explains most of its quirks.

Custodial: someone else holds the sats#

The wallet company (or server) holds the bitcoin; you hold an account balance. Examples include hosted Lightning address services and many "just works" wallets.

Good:

• Instant setup, no channels, no fees to get started.
• Receives while your phone is off. Great for zaps and a Lightning address.
• Tiny amounts work fine.

Bad:

• They can freeze, lose, or be forced to block your balance. The service can shut down.
• They see your payments.
• Some regions lose access when a company exits a country.

Self-custodial: you hold the keys#

Your phone or node holds the keys and the channels. Examples include mobile wallets that manage a channel for you, and full node setups.

Good:

• Nobody can freeze your funds. You back up a seed, like an on-chain wallet.
• Better privacy than an account on someone's server.

Bad:

• Getting set up usually costs something: the first receive often opens a channel (a fee), and some wallets have minimum amounts.
• To receive, the app usually needs to be reachable (or woken by a notification).
• More things can go wrong: liquidity, fees, stuck payments.

Rule of thumb#

• Pocket money and zaps: custodial is fine. Keep it small, like cash in a wallet.
• Anything you'd hate to lose: self-custodial, with the seed backed up offline.
• Savings: on-chain, not Lightning.

Many people use both: a custodial Lightning address for zaps, and they sweep the balance to a self-custodial or on-chain wallet when it grows.

Questions to ask before you pick#

1. Who holds the keys? If the wallet never shows you a seed phrase, it's probably custodial.
2. What does the first receive cost, and is there a minimum?
3. Does it give you a Lightning address, or do you need a separate one?
4. Can you export or recover the funds if the app disappears?

Questions? Reply and I'll add them here.