Just like using a leather wallet to hold your fiat currency safely, a crypto wallet is used to keep your digital funds safe in one place. The idea underlying the establishment of blockchain was to set up a decentralized system that is transparent enough to help you own your money and keep it safe.
Conventionally, banks would use the money that you invested to loan it further, taking away the power to manage and control the money from you. This flawed system, which had been eluding us for centuries, was overcome when blockchain technology was made known to the world in 2008.
Ever since crypto has been evolving by elevating its value unprecedentedly. Consequently, the use of digital wallets has been vital, more than ever, to store and manage your digital currency.
How does a crypto wallet ensure the security of your funds?
Each crypto wallet is secured with a unique set of private and public key, that is specifically linked to each other. The public key is like an email address you share with others while carrying out a transaction.
However, the private key is like a password to that email account that particularly grants access to the account (and its details) to the holder of the key. This key makes you the owner of your funds. The system of the digital wallet is, hence, a protocol that would generate secure codes unique to your account only, and it would help you manage your funds on the blockchain.
Why should you prefer crypto wallets over exchange wallets?
Cryptocurrency exchanges are the platforms that allow you to trade fiat currency to crypto, crypto to fiat currency, and crypto to crypto. There are some crypto wallets that offer the facility themselves. When you register at a cryptocurrency exchange, an account gets created against your name automatically.
While making a purchase there, the cryptocurrency gets stored in your account. However, the funds stored over an exchange are possessed by the platform instead of you. On the other hand, a crypto wallet would overcome this issue, and grant you the complete ownership of your account, to manage your funds the way you would feel free to do it.
How Crypto Wallets work: an example
Two friends, Jimmy and Tom, are getting involved in a cryptocurrency transaction using wallets registered against their accounts. Jimmy is buying Bitcoins from Tom worth $70,000. For this, Jimmy transfers this fiat currency value to Tom’s account and also shares his public wallet key with Tom.
On receiving the money from Jimmy, Tom accesses his wallet to enter the wallet key shared by Jimmy and transfers Bitcoins worth $70,000. Only after Tom signs the transaction with his private key, is the transaction considered complete and is forwarded to be validated over the blockchain. After this validation, Jimmy’s public key gets associated with the Bitcoins received. The ownership of the Bitcoins, now, will only be accessible and using Jimmy’s private key.
Thus, a crypto wallet adds a layer of security to your funds while storing, accessing, or transacting funds to grant you complete ownership of your account.
Types of crypto wallets
Hot wallets have internet connectivity. Hence these are more vulnerable to malicious cyber-attacks. However, they are user-friendly, especially for making daily transactions. Only a small value of funds is suggested to be stored in hot wallets.
They have further classified as- Desktop wallets (software apps for operating systems; antivirus is required; examples Exodus, Bitcoin core, Electrum), Mobile wallets (software apps over smartphones, example Bitcoin Code Denmark (bitcoincodedenmark.com)); even more convenient because of QR code-based transactions; examples Coinomi, Mycelium), and Web wallets (accessible over internet browsers; for small and quicker payments; most insecure wallets; examples MetaMask and Coinbase)
Cold wallets are stored offline, require no internet connectivity, have improved security, and are less risky. They are very much suitable for holding funds for a longer period of time.
They are further classified as- hardware wallets (resemble USB sticks to store public and private keys; provided with a screen and operating buttons; examples Ledger Nano S and Trezor), and paper wallets (printed papers with QR code, public and private keys; quite fragile owing to its ability to get lost)
Based on authority, three more types of wallets have been identified- multisig wallets (which requires multiple layers of security keys for authentication and access into accounts), custodial wallets (usually provided by cryptocurrency exchanges, holding the authority over it), and full-node wallets (holds a copy of blockchain locally to validate transactions and stores digital assets; useful for miners holding huge amounts of digital assets).
An important purpose of a cryptocurrency wallet is to serve as your own bank, being accessed and authorized solely by you, storing your assets and funds over a decentralized network. You may choose any of the wallet types that suit your criteria and utility to secure your funds. The whole idea of blockchain, however, rests on the non-regularization of the world of transactions; so the presence of customer support, government involvement, or even insurance is almost impossible in the realm of cryptocurrencies!
Founder Dinis Guarda
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