What Is the Difference between a Custodial and Non-Custodial Derivatives Exchange?

A custodial derivatives exchange holds and manages users' funds and private keys, acting much like a traditional bank. This means the exchange is a third-party custodian responsible for the security of the assets.

In contrast, a non-custodial exchange (or DEX) allows users to trade directly from their own wallets, maintaining full control over their private keys and funds. The core difference is who holds the keys: a third party or the user themselves.

This distinction impacts security, control, and user responsibility.