Crypto Wallet Best Practices: Tips, Tricks and Alpha
Part 1: Crypto Wallet Basics
1) Overview
The current world of crypto is akin to the early 1990’s era of the internet. User interfaces are overly complex and clunky, dApps and apps are still finding their respective places and value propositions, and mass adoption is nothing but a distant twinkle in the eyes of the pioneering early adopters.
Much like Netscape and other early web browsers were our gateways into the true mass adoption of the internet and the exploration of its full potential, so too are wallets our gateway into the world of blockchain and crypto. Wallets are the front facing user interfaces (UIs) that act as our translators. They are the user friendly layer that enables and simplifies our interactions with Web3 and the various blockchains that make up the underlying structure.
One day all the complexities of blockchain interactions will be abstracted away from users, hidden behind sleek and simple UI’s so that a user does not need to know the inner workings, just as today we don’t need to know how browsers interact with the web. Until then however, we need to understand what exactly a crypto “Wallet” is, how it secures our crypto and how it allows us to interact with the blockchain. In other words we need to understand its inner workings. Make no mistake, crypto is still very much the new wild west, and you better know how to handle a pistol -er, wallet — if you want to stay safe and build wealth in this new financial revolution.
The following will deep dive into the basics of what a wallet is, how it works and how to use it to your advantage, and some advanced tips and tricks to gain an edge over the competition.
2) What is a crypto “wallet”?
Quite simply, a wallet is an interface that stores your private keys and allows a user to interact with the blockchain and exert control over the crypto assets associated with their blockchain address.
The term “wallet” is misleading. In truth, a wallet does not actually hold any cryptocurrency. A wallet creates and stores your seed phrase and uses that seed phrase to generate a private and public key pair. Those keys are what allow you to interact with the blockchain(s). Your public key is effectively your address, think of it as your account number. You can receive crypto with it just as you can with a bank account, but to access it you require the associated private key that was generated from your seed phrase.
The same seed phrase can generate multiple pairs of keys so that you can interact with Ethereum , Binance Smart Chain, Bitcoin and all kinds of other chains using the private/public keys generated from the same seed phrase. You can even generate multiple accounts within a single chain, each with their own key pair, but all derived from the same seed phrase. Needless to say, your seed phrase and private keys should NEVER be revealed or you risk losing control of the connected cryptocurrency.
In short, a wallet stores your seed phrase and private keys so that every time you sign a transaction with that wallet, you are proving ownership of the private key associated with the public address, enabling you to send, receive, and transact on various blockchains.
3) How does a crypto wallet work?
A wallet takes your private keys and signs transactions. This signature proves ownership of the associated public address. Each time you interact with the blockchain, you are sending info to that distributed ledger (EVM in the case of Ethereum) and telling it how to update your balances. The balances themselves are not actually stored within the wallet. Instead, they are stored on the distributed ledger and attributed to your public address. The balance on that ledger can only be updated with your private keys, or a party approved by you with your private keys.
Without getting too granular, if you send ETH for example, you are signing a transaction in your wallet and broadcasting it to the validators telling them to reduce your balance and increase the balance on the receiver’s address. If you do the same with an ERC-20 token, it is a little different in that you are actually updating the balance within the smart contract that governs that token, a separate “sub-ledger”. In fact, in any smart contract interaction, you must sign a transaction with your wallet and each interaction requires a fee to be paid to validators, a “gas fee”, generally paid in the native token/currency (a more in-depth gas fee discussion to follow).
The reason a wallet is required at all is because blockchains don’t have their own user interfaces. They are distributed ledgers that use blockchain technology to ensure no intermediary is needed, no trusted third party. The very ethos of crypto is based on self custody, where no counterparty risk exists and one can access their crypto pseudonymously and permissionlessly. This kind of freedom comes with a great deal of responsibility, in which a user must carefully and meticulously protect their private keys at all times.
4) Wallet Types
There are two main types of crypto wallets; hot wallets and cold wallets. Each has it’s own set of unique advantages and disadvantages, but both are phenomenal upgrades as compared to holding your crypto on a centralized exchange. As we have seen with recent collapses of centralized platforms like Celsius, FTX and others, if you want to survive long term in the volatile wild west of crypto, a self-custody solution is a must. Which wallet(s) you choose will depend on your goals and activity. Are you a hodler or a DeFi enthusiast? Do you love ape-ing into the latest NFT drop, or launchpad flash sale? Or would you prefer to hide your grandpa’s Bitcoin in cold storage in your attic?
i ) Hot Wallets (Desktop and Mobile)
Hot wallets are so named because they store your seed phrase and private keys in a medium that is connected to the internet, hence the term “hot”. They are the simplest to use, and typically have better user interfaces and maximum level of compatibility. Top examples include Metamask, Exodus and Atomic Wallet. What they offer in convenience is offset by a lower level of security.
There are two types of hot wallets: Desktop and Mobile. Desktop hot wallets store your keys locally, typically on a web extension, but sometimes on a desktop application. Mobile wallets store your keys locally on a mobile App. Generally speaking, a desktop wallet is more secure than a mobile version, but certainly has its vulnerabilities as well.
PROS:
- High level of compatibility with dApps and protocols
- Smoother more user-friendly user interfaces
- Better for DeFi, NFT, Launchpad and other active users.
- Should be for active portions of your portfolio only, with larger balances being sent to cold wallets.
- Large number of wallet options, with wallet choice being heavily influenced by your intended use-case.
- Generally free, or low cost.
CONS:
- Lower level of security as compared to cold wallets.
- Given the higher blockchain interaction levels, a more robust knowledge of settings and mechanics can sometimes be required for optimal use.
- Depending on your wallet choice, supported crypto can be restricted (eg. Metamask supports strictly EVM-compatible chains)
As a rule of thumb, if your goal is more in-depth interactions with smart contracts and dApps, a super compatible desktop wallet like Metamask is your best bet, with a backup cold wallet to store your gains and long term holds. If you want to really step up your safety and security, dedicate one hot wallet to contract interactions, another for hodling of tokens and assets that may require voting or staking (low risk), and a cold wallet for long term storage.
ii) Cold Wallets:
Cold wallets are the Fort Knox of crypto storage. Although the UIs and UXs are improving very quickly, they do sacrifice convenience in exchange for security and safety. They are generally air-gapped from the internet, and your seed phrase and private keys never leave the device itself. The most popular versions are Ledger and Trezor, both of which are effectively USB devices that generate and store your seed phrase and private keys and keep them from ever directly touching the internet. All transactions must be physically confirmed via buttons on the devices, and are managed via desktop or mobile apps that act as the user interfaces to interact with the devices. In other words, you create and customize your transaction on the apps, which communicate with the device via USB or Bluetooth, and present the user with a transaction which must be physically confirmed via hardware buttons. The device then sends the signed transaction back to the app, which broadcasts it to the blockchain of choice, keeping the private keys siloed on the device at all times.
PROS:
- Maximum security for your crypto, air-gapped from the internet, and requiring physical acceptance of transactions
- Can support almost all cryptocurrencies in a single wallet
CONS:
- Less convenient, and can be cumbersome when interacting in DeFi or minting processes.
- Lower compatibility, can present issues when performing more complex transactions.
- Must be purchased, and can be relatively costly.
5) Displaying Your Crypto Assets (Importing Tokens)
One of the first and most common issues when starting your journey into the Altcoin forest and the more in-depth uses of your crypto wallets, is how your wallet actually displays (or more likely does NOT display) your crypto assets. This is because wallets have to constantly query the blockchain with what are called API calls; messages sent to nodes to tell the wallet what assets are actually held in the blockchain address. Equally annoying are the spam tokens and NFTs that are constantly being sent to our wallets, many of which are malicious and should never be interacted with.
While there are a variety of ways to deal with this, understanding token contracts is a must in avoiding scams and getting an edge over the competition. We will discuss token contracts in more detail in the advanced section. In short, every token has it’s own unique contract address (both NFT’s and ERC-20s). Your wallet may not always display those tokens, particularly if you dabble is some of the smaller cap and more obscure altcoins. To make sure your wallet accurately reflects your crypto holdings, visit a reputable token listing website such as CoinGecko or CoinMarketCap and search for the coin in question.
Copy the token address as per above, and depending on your wallet of choice, use the option to “add custom token” or “import token”. Paste the contract address, and voila: your tokens should display in your wallet. You can also use services such as Zerion.io or Zapper.fi in case you have forgotten what tokens you own. They do a great job of automating most of the process. If you are still unsuccessful, you can actually use a block explorer like Etherscan which will have a full listing of every single crypto asset associated with your wallet address.
6) Wallet Safety
Gaining in-depth knowledge of how to navigate on-chain crypto and crypto wallets is a lengthy endeavor, and must realistically be done in stages and through experience. All of that knowledge is for naught, however, if you cannot protect your crypto with proper wallet safety. Below is an overview of wallet safety best practices, expanded upon in the advanced section.
i) Seed phrases:
- should be kept secret at all times
- never saved to the cloud or shared via email
- kept hidden and stored on paper (or steel protector) in at least two locations for redundancy.
- never take a photo or expose it to webcams or public WiFi
- no customer support or protocol will EVER need your seed phrase. Do not reveal it under any circumstances to those you do not trust explicitly (and maybe not even then)
ii) Wallet type:
- Cold wallets should be used for storage
- Hot wallets for active interaction with blockchains
iii) Wallet Connections and Approvals:
- Never give a token approval to any protocol you do not trust. This gives them the ability to spend that token unilaterally, without any additional express consent.
- When giving token approvals, edit the approved amount to the minimum needed (more on this in the advanced section). This caps how much can be taken from your wallet by that protocol.
- Revoke token approvals that are no longer needed (more on this in the advanced section). This will reduce the possibility of retroactive exploits (eg. stolen protocol keys, hacks, dishonest actors, etc)
iv) VPN’s and Networks:
- Always use a VPN when transacting in crypto to protect your identity and personal information.
- Be cautious when adding Networks for new blockchains (use trusted services like Pocket Network or Chainlist to add networks). Fraudulent networks can drain your funds.
v) Token and NFT Contracts:
- Always use token contract addresses direct from company websites and/or CoinGecko and CoinMarketCap. Fake tokens are commonplace and can trick you into buying a token with no value.
- Double check NFT contract addresses prior to purchasing to avoid knock-offs or forgeries.
- Check that the NFT you are buying is not flagged on any marketplaces as stolen, as this can affect the resale value.
vi) Phishing and token airdrops:
- Never interact with an unknown airdropped token or NFT. These can have malicious code that can compromise your wallet. Even a simple swap could be problematic.
- Do not connect to unverified sites, and do not sign any transactions on sites without careful consideration.
- Never click links in Telegram, Discord or emails that you do not recognize. These can infect your computer with malware and compromise your wallets.
vii) General:
- Always check the domains of websites you are connecting to with your wallet, and bookmark them for future use. A fairly common attack vector is domain name copycats where scammers will impersonate another website and initiate fraudulent transactions.
- Never put all your eggs in one basket. Use multiple wallets to spread the risk.
7) Convenience and User Experience
Over the last couple years, user interfaces and general user experiences have improved by leaps and bounds. That said, we are still very early, and there is plenty of room for improvement. Finding the right convenience and efficiency tools can be very helpful in navigating the crypto wild west, while mitigating exposure to bridges and swapping protocols that can add an additional layers of risk.
The best platforms to use for convenience and an extra layer of protection are the all-in-one wallets that aggregate bridges, Dex’s and tracking in the same platform. Top rated examples include platforms like Zerion.io or Zapper.fi, which abstract the cross chain bridging and swapping to single-click functions while also being very cost effective. You can also track your on-chain assets by simply connecting your wallets, or track high profile wallets to see what the pros are doing. In the case of Zerion.io, you can also purchase a rare Genesis NFT for free fees for life (Currently approx. $100 on the secondary markets).
Another little trick for active DeFi users is adding a telegram bot to track your wallet activity. The free bot will notify you when any transactions occur in your tracked wallets. This way you are able to keep an eye on them for illicit activity, or simply to watch for token vesting or airdrops you have been waiting for.
Bridges and Dex aggregators are also great tools. The trend with these protocols seems to be one of being relegated to the back end, where the above mentioned wallets actually integrate them into their UIs and implement them into simpler user-friendly front ends. That said, if you do engage in the more intricate and complex DeFI transactions, or transact with larger sums, it can be beneficial and efficient to go direct to some of the bridges or aggregators. Top bridges include platforms like Multichain.xyz, Hyphen Bridge or Axelar. Dex aggregators include platforms like 1Inch, SushiSwap, ParaSwap and plenty of others.
Now that we have officially uploaded the basics, and perhaps some of the intermediate crypto wallet knowledge, you are ready to start your deep dive into the rabbit hole of the advanced tips and tricks. Grab a coffee (and maybe something with a bit more kick), and check out Part 2 of this articled discussing advanced tips and tricks.
Thanks for reading and hope you enjoyed!
Sovereign Crypto (Aka. RickyBobby | Xborg)
Xborg Content Council
