Custodial staking happens when you deposit tokens with an exchange or platform and it stakes on your behalf. You never touch a validator directly; the platform holds the private keys, handles delegation, and credits rewards to your account balance. This is the simplest option but means you're trusting that platform's security and solvency — 'not your keys, not your coins' applies here as it does to any exchange balance.
Non-custodial staking keeps you in control of your private keys throughout. This includes delegating directly from a self-custody wallet (like Ledger Live or Trust Wallet) to a validator of your choice, running your own validator, or using a non-custodial liquid staking protocol like Lido or Rocket Pool, where funds move through audited smart contracts rather than a company's balance sheet.
Neither approach eliminates risk entirely. Custodial staking concentrates counterparty risk in the platform; non-custodial staking shifts risk onto your own key management practices and the smart contracts involved. Many experienced holders split staked positions across both models to diversify where the risk actually sits.