Module 3: Custodial vs Dynamic Funding Models: Core Product Decisions
Introduction
One of the most fundamental product architecture decisions you must make when building a payout system is:
Will users pre-fund and hold balances with your platform (Custodial Wallet Model)?
Or will users fund payouts dynamically, transaction-by-transaction (Dynamic Funding Model)?
Each model creates different:
Treasury risks
User experiences
Operational complexities
Legal exposures
Scalability characteristics.
Choosing the wrong model for your market or user type can destroy product trust and operational efficiency.
In this module, we will break down the two funding models, their tradeoffs, and how to choose correctly.
Custodial Wallet Funding Model
In the Custodial Model, users pre-fund an internal wallet balance on your platform.
When they initiate a payout, you deduct directly from their wallet without waiting for a new external payment.
Flow Example
User deposits 0.5 BTC into their Bitnob Wallet.
Later, the user initiates a payout of $100 worth of NGN to a Nigerian bank account.
The system deducts from the preloaded wallet balance instantly.
Payout proceeds immediately.
Advantages of Custodial Model
Faster Payouts: No need to wait for funding confirmation. Transactions execute immediately.
Better User Experience: No "pay first, wait" friction at time of action.
Internal Liquidity Control: You control user float, enabling batch processing, treasury optimization.
Flexible Payment Schedules: Users can automate payouts without needing to manually fund each time.
Risks and Costs of Custodial Model
Custody Risk: You hold users' funds. You must secure them perfectly or risk financial and reputational loss.
Regulatory Risk: In many jurisdictions, holding customer balances may trigger licensing, reporting, and compliance obligations.
Operational Burden: You must monitor wallet balances, prevent double-spends, and manage reconciliation carefully.
Fraud Risk: Users may attempt internal fraud if balance tracking is not real-time and accurate.
Dynamic (On-the-Fly) Funding Model
In the Dynamic Funding Model, users fund each payout individually at the time of action.
There is no wallet balance held by your platform. Each payout is separately funded via Bitcoin, stablecoin, or fiat before execution.
Flow Example
User requests to send $100 payout to Kenya.
Bitnob generates a payment address and funding amount.
User pays in Bitcoin or USDT.
After payment confirmation, the payout is executed.
Advantages of Dynamic Funding Model
No Custody Risk: You do not hold user funds except momentarily during the payout execution phase.
Simpler Compliance: Reduces licensing burdens in many jurisdictions compared to full custody models.
Operational Simplicity: No wallet balance management, no internal float reconciliation.
Faster Go-to-Market: Easier onboarding of new customers without needing regulatory approvals for holding balances.
Risks and Costs of Dynamic Funding Model
Funding Friction: Users must fund each payout, which can delay time-to-payout compared to wallet-funded instant execution.
Volatility Risk: Between user quote generation and funding confirmation, Bitcoin or FX rates may move.
Funding Expiry Risk: If users delay or underfund, payout fails or must be adjusted.
Confirmation Delays: Bitcoin or blockchain payment confirmations introduce extra time before payout processing can start.
How to Choose Between Custodial and Dynamic Funding
| Question | Favor Custodial | Favor Dynamic |
|---|---|---|
Target user wants payouts instantly? | Yes | No |
You can manage custody licensing risk? | Yes | No |
You want to optimize batch payouts and float management? | Yes | No |
You need to onboard customers faster with lighter KYC? | No | Yes |
Your operational team can secure internal balances at scale? | Yes | No |
You prefer externalized liquidity and lower treasury complexity? | No | Yes |
Hybrid Models (Optional)
Some advanced platforms combine both:
Power users pre-fund wallets for instant payouts.
New or low-volume users use dynamic funding per transaction.
This hybrid model optimizes for user flexibility, but is harder to build and secure properly.
Practical Example
A B2B platform serving large merchant clients may prefer a Custodial Model:
Merchants deposit float weekly, and payouts execute instantly when their users request funds.
A consumer-facing mobile app doing cross-border micro-payouts may prefer a Dynamic Model:
Each payout is individually funded via Lightning or stablecoins, minimizing custody complexity.
PM Action Checklist (End of Module 3)
Map your user base: Do they expect instant payouts, or can they handle payment-per-payout flows?
Audit your regulatory exposure: Can your company legally hold user funds? If not, favor dynamic funding.
Model liquidity risk: Custody models require float forecasting, dynamic models require confirmation window management.
Decide treasury and ops team readiness: Custody adds major security, monitoring, and reconciliation responsibilities.
Consider future growth: If you plan to scale internationally, dynamic models may simplify expansion.
Closing Reflection
Holding user balances is a power and a burden.
Managing dynamic funding flows is a flexibility and a risk.
As a PM, you must design for both user expectations and operational survivability. Make the right funding architecture decision early. It will shape every other system and team you build afterward.
In the next module, we will walk through Building a Full Payout Lifecycle: Quotes, Funding, Processing, Completion.
