A wallet in the traditional sense is a physical place to store your methods of payment and ID. It’s not so secure since a would be thief only needs to physically steal your wallet to access your paper cash or credit cards.
What is a Crypto Wallet?
A digital wallet or crypto wallet is similar in that holds your crypto assets. You might have different ones for different assets because different blockchains sometimes require separate tools, but all Crypto wallets operate on the same principles of public key cryptography. The goal however is not always to hide the contents of the wallets or transactions depending on the specific blockchain, but to secure control of a wallet. So you don’t actually host your assets in the wallet, but rather you host private keys in wallet which control access.
When a wallet is created, usually a set of 12–24 words is generated. This set of words can be referred to as a seed phrase or recovery phrase. Words are used instead of random characters mashed together since it’s easier to remember. The seed phrase then generates private keys that controls access to send or spend your crypto assets. Keeping track of the seed phrase is of utmost importance since it is essentially a master key to your wallet.
If you lose your seed phrase, you cannot access your crypto!
Properties of Wallets
Internet Connectivity (Hot vs Cold)
Hot and cold are used to describe the internet connectivity of a wallet. There are some hybrid approaches that try to maximize convenience while minimizing risks.
Hot wallets connect to the internet and carry the security risks that come with it. They are significantly more convenient since they can be used to interact with online services and decentralized apps (Dapps) primarily. Dapps are just like normal apps except that they exist on a peer-to-peer networks. This utility makes hot wallets what you want to use on a daily basis for trading and buying things.
Cold Wallets store your private keys offline and don’t require internet connectivity. This is what you would use to store your crypto assets long term because your private keys have less risk exposure making them more secure.
Private Key Custody (Hosted vs Non-Hosted)
Custody of the private keys determines whether or not a wallet is hosted or not. If you as the owner of the wallet know the wallet’s seed phrase, then the wallet can be considered Non-hosted. If you do not know the seed phrase of the wallet and it is kept by a third party, the wallet is hosted.
Services that host wallets such as centralized exchanges hold lots of assets which make them targets of hacks and cyber attacks which may put your assets at risk. Historically, whether or not your assets are insured and will be returned in the case of a hack is not guaranteed. Owning your own keys means the burden of maintaining them in a secure place falls on you, but it reduces the risk of being victim to major hacks. The trade off is that you become liable for determining how you grant access or spend your crypto.
Types of Wallets
Hardware Wallets
Hardware wallets store private keys on a physical device usually about the size of a USB drive, but they do come in different forms. In order to spend or send your crypto, you have to physically plug in your hardware wallet to your computer to approve any outgoing transactions. These wallets are cold and non-hosted.
Desktop Wallets
A desktop wallet is a software package installed locally on a computer which keeps your keys on the computer and can provide some useful functionality with it such as swap features or staking. Features are highly dependent on the software publisher/developer. They may or may not be connected to the internet so it can be either hot or cold. This is also typically non-hosted.
Mobile Wallets
A mobile wallet is like a desktop wallet except that it is meant for your phone. Similarly, features are highly dependent on the publisher/developer, but are inherently more convenient due to the level of connectivity a phone can provide and the fact that it’s easier to read QR codes that many wallets and services provide. These wallets can be hosted or non-hosted since many exchanges provide custodial mobile apps.
Web Wallets
Web wallets are accessible by internet browsers via extensions such as in Chrome or Firefox or via built-in-wallets like in Brave browser. These wallets are the least secure, but provide the greatest level of convenience. It is suggested to only leave a small amount of funds necessary to do your transactions.
Paper Wallets
Paper wallets are quite literally a piece of paper containing your keys or a QR code that grants access to your crypto. These are meant to be single use and are secure as long as nobody, but you can access the piece of paper. They tradeoffs are not worth it compared to a hardware wallet, but can still be viable given the proper precautions are taken.
Depending on your use case, you may only need one wallet or you may need many. Consider all the trade-offs and benefits before coming to a decision. No matter which you choose, security of your private keys and seed phrase should always be the primary concern.
Thanks for reading and check in next time.
Kakavarna.eth — Automation Engineer(9–5), crypto investor, and gamer with opinions
