Before delving into the cryptocurrency world, you must be fully equipped with the necessary tools to make your journey easier. And what better place to start than understanding crypto wallets? Enthusiasts in this industry must have a sufficient understanding of their digital asset vaults to prevent infiltration by hackers.
Thus, we shall act as your crypto help and delve into what the cryptocurrency wallet is all about. Let’s get into it!
What is a Cryptocurrency Wallet?
A crypto wallet is an app that functions like a conventional wallet, i.e., you store your digital assets in it. So instead of keeping your crypto assets at hand, the wallet stores the passcodes you use for your transactions. It then provides the interface that allows you to access your assets.
Crypto wallets are now a step further from when cryptocurrency first emerged. In previous years crypto enthusiasts would have to enter long key phrases before carrying out any transaction. But with wallets, it is more easily accessible as the software does most of the work.
The very first digital wallet originates from Satoshi Nakamoto, the developer of Bitcoin.
How Does It Work?
Generally, digital wallets are software apps run on computers and mobile devices like phones, tablets, etc. To access the blockchain network for the crypto you use, they require access to an internet connection. And usually, crypto wallets consist of two keys; the public key, your wallet address, and the private key, which you need to sign digital transactions.
It is important to note that digital currencies are not “stored” anywhere because they consist of bits and pieces of data kept safe and scattered all over a database. As such, when you sign in to your app, the wallet combines all the bits associated with your address. And the summed-up balance is what you see in the interface.
So with these software applications, performing cryptocurrency transactions is very easy. To send, you enter the recipient’s public key, select the amount you wish to send, and add the amount you would pay as the transaction fee. You then authorize the transaction using your private key and click send.
Receiving is even much easier. The sender enters your wallet address through the same process listed earlier. Then you accept the payment if required, and that’s all.
What Are The Different Types?
There are various types of digital wallets, depending on their classification. But the two major types are custodial and non-custodial.
Custodial wallets are those where a third party stores your passkeys for you. These third parties are usually companies that use data security systems to preserve and secure their consumers’ info.
On the other hand, non-custodial wallets are those in which you are in charge of keeping your keys safe. And this is the kind that is often found on devices.
Furthermore, beyond these two wallet types, there is another subcategory classified as hot or cold. So hot wallets have an internet connection, whereas cold wallets are not connected to the internet.
In addition, there are other subcategories consisting of the following.
1. Paper Wallet
Before the advent of hardware and software, paper wallets were the rage. Then, digital asset owners would write down their keys or print them out on paper, hence the name. These soon morphed to include QR codes so mobile wallets could scan them.
This type of wallet soon lost significance because it could easily get damaged or misplaced. As such, it is hardly in use anymore.
2. Hardware Wallet
They look like USB devices and are also used in the same way. So you plug in your drive to the computer and then conduct your transaction. These are quite common and are usually considered cold wallets because they do not have an internet connection until they get plugged in.
This wallet type is very secure because you do not always have to enter your key to authorize transactions. So this keeps your details safe from hackers who log your keypresses or record your screen.
3. Software Wallet
Software wallets, also known as mobile wallets, are applications installed on computers or mobile devices. With these, you can access digital assets, show your balance, perform transactions, and do other activities. Some mobile apps even integrate extra features like exchange integration if you use a crypto exchange wallet.
How Secure is a Crypto Wallet?
Keeping your wallet secure is important, considering hackers often target crypto assets. So to protect users’ assets and info, wallets often use encryption and blockchain technology. Other safeguards include password protection, two-factor authentication, or offline storage of large cryptocurrency amounts.
In addition, most wallets nowadays use randomly generated words as mnemonic seed phrases. Usually, it is a twelve-word phrase created and linked to your account. And it is used to restore your wallet on a new device if the previous one gets damaged.
It is very important to keep these seed phrases safe because anyone with access to it can enter your wallet and perform transactions.
Closing Text
As a digital asset owner, you cannot access your crypto without a wallet. So you must have substantial knowledge of this storage tool to ensure your cryptocurrencies are safe and secure.
Salman is a prolific environmental writer, and has authored more than 500 articles in reputed journals, magazines and websites. He is proactively engaged in creating mass awareness on renewable energy, waste management, sustainability and conservation all over the world.
Salman can be reached on salman@cleantechloops.com
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