What Is a Crypto Wallet?
A Beginner’s Guide to crypto wallets
Cryptocurrency wallets store users’ public and private keys while providing an easy-to-use interface to manage crypto balances. They also support cryptocurrency transfers through the blockchain. Some wallets even allow users to perform certain actions with their crypto assets, such as buying and selling or interacting with decentralized applications (dApps).
It is important to remember that cryptocurrency transactions do not represent a ‘sending’ of crypto tokens from a person’s mobile phone to someone else’s mobile phone. When sending tokens, a user’s private key signs the transaction and broadcasts it to the blockchain network. The network then includes the transaction to reflect the updated balance in both the sender’s and recipient’s addresses.
So, the term ‘wallet’ is somewhat of a misnomer, as crypto wallets don’t actually store cryptocurrency in the same way physical wallets hold cash. Instead, they read the public ledger to show the balances in a user’s addresses, as well as hold the private keys that enable the user to make transactions.
Different Types of Crypto Wallets
1. Software-based Hot Wallets:
Hot wallets are connected to the internet, offering convenient accessibility for day-to-day trading. They include:
Web-based wallets: These wallets operate through a web browser, allowing users to access their funds from any device with an internet connection.
Mobile wallets: Designed for smartphones, these wallets provide easy access to cryptocurrencies on the go, making them ideal for frequent transactions.
Desktop wallets: Installed on a computer, desktop wallets offer a higher level of security compared to web-based wallets.
While hot wallets offer accessibility, they are more susceptible to online threats, making them suitable for smaller amounts or short-term storage.
2. Physical Cold Wallets:
Cold wallets, also known as hardware wallets, provide an offline storage solution for enhanced security. They come in physical forms, such as USB devices, and ensure private key protection. Examples include:
Paper wallets: A paper wallet involves printing or writing down the private and public keys on paper, offering an offline method of storing cryptocurrency.
Hardware wallets: These external devices store private keys and require physical interaction to sign transactions securely. Hardware wallets offer robust protection against online attacks.
Cold wallets are recommended for long-term storage or larger amounts of cryptocurrencAy, as they provide enhanced security by keeping private keys offline.
Custodial and Non-Custodial Wallets:
Crypto wallets can also be classified based on custodial control:
Custodial wallets: Often provided by cryptocurrency exchanges, custodial wallets offer convenience and ease of use. However, users do not have full control over their tokens, as the private keys are held by the exchange. Trust in the service provider's security practices is essential when using custodial wallets.
Non-custodial wallets: Non-custodial wallets empower users to retain full control over their funds. Private keys are stored locally, and users are responsible for the security of their wallets and private keys. Non-custodial wallets include software-based wallets and hardware wallets.
Non-custodial wallets provide the highest level of control and are ideal for users seeking complete ownership of their cryptocurrency.
Choosing the right crypto wallet depends on your specific needs and preferences. Hot wallets provide convenience for frequent trading, while cold wallets offer enhanced security for long-term storage. Custodial wallets may suit beginners or those preferring convenience, while non-custodial wallets grant full control and ownership.