When speaking about Ethereum, smart contracts and decentralised exchanges a term non-custodial is often used. What does non-custodial mean in the context of smart contracts and exchanges?
Non-custodial is opposite to custodial where someone else has custody of your assets and can decide what to do with them. For example, in a centralised cryptocurrency exchange, the exchange operator can do whatever they want with your deposits. Because of trustless nature of cryptocurrencies, insider fraud and hacks rampart with custodial services. Other custodial risks include bankruptcy, unavailability (offline) and regulatory risks (shut down because of legal unclarity).
Smart contracts can be designed to be non-custodial. No one has a master key that would make trades, transactions or other actions to go one way or another. The transactions are solely governed by the laws of smart contracts. No human can change the outcome of the contract.
When the contract rules are written as the smart contract, its non-custodial nature makes smart contract-based of services less risky than custodial services. Whereas custodial services always have a counterparty risk from its operator, smart contracts do not have this risk.