Cryptocurrency Wallets (Blockchain series — Part II)

Sending and receiving tokens

Cryptocurrency tokens are constantly sent and received among numerous users throughout a given day. Earlier in the series, we discussed the path on which these tokens proceed to reach their final destination. We did not, however, discuss the actual storage of tokens. This article serves the purpose to simplify the explanation of the general protocol for storing tokens and then relate that protocol to the storage of Bether.

A Brief Overview

A common misconception among novice cryptocurrency enthusiasts and investors is the actual existence of currencies. Bitcoins, Ether, Ripple, NEO, or any other crypto-tokens do not exist in a physical state. Hence, one cannot go to the bank and receive physical bitcoin for a given online balance. Instead, transactions (currencies) are stored on the parent blockchain and the public and private keys associated with the currency of the parent blockchain are stored in “wallets.” Cryptocurrency wallets show users’ token balances based on transaction histories. When individuals buy and sell tokens, they are not actually sending and receiving currency. Senders authorize transactions to receivers with their private key and verify ownership of tokens with their public key. Once a transaction is verified, the sender’s wallet balance decreases, the receiver’s wallet balance increases, and the transaction gets logged on the public ledger of the blockchain.

9 Key Wallet Characteristics

Seems confusing, right? We’ll break this process down further, but first let’s detail the 9 main characteristics of cryptocurrency wallets:

1. There are three main elements to a given wallet; the public address, the public key, and the private key.
2. All three elements are mathematically related to each other.
3. The wallet address is used to set the final destination of the currency in a transaction.
4. The private key is a user’s digital ID and used to “sign” for spending, transferring, or withdrawing currency from a wallet.
5. The public key verifies that a signature came directly from a user’s private key.
6. Each private key is paired with a public key.
7. When a wallet address changes, the public and private keys change as well.
8. Some wallets assign new addresses on every transaction to protect user privacy.
9. Each wallet may be compatible with one cryptocurrency or may be compatible with multiple currencies (for example, there are specific wallets for Ether and Bitcoin, but there are also wallets that allow the holding of both Ether and Bitcoin).

Note: There are several different types of wallets (online, mobile, desktop, hardware, and paper) with varying levels of security, but each contain the same characteristics.

Wallet Functionality Simplified

We mentioned the three interrelated elements of all wallets. These elements are interrelated in regard that the private key generates the public key, and the public key generates the wallet address. All wallets automatically generate these elements for users, but token holders should be aware of the functionality associated with the codes. Think of the wallet address as a home address, the public key as the home owner, and the private key as the key to the lock on home mailbox. Anyone can send mail to the mailbox at the home address, but only the home owner with the key to the mailbox can take the contents out and send them elsewhere. In the example, if the home owner were to lose his mailbox key, they would never be able to retrieve the contents from the mailbox. This method works the same when sending and receiving tokens. Anyone can receive tokens based on their address. Furthermore, anyone can verify that a transaction was authorized by a certain user based on that user’s public key. Only a user with the private key to a given wallet, however, can unlock the contents to that wallet to send elsewhere. It is important to note that a private key can be used to generate a new public key, but a public key cannot be reversed to generate a private key.

Token Balances

You may be wondering, if keys (not tokens) are actually stored in wallets, how are balances derived? As mentioned previously, all transactions are logged on the public ledger of a given blockchain. The currency, therefore, exists solely on the blockchain. Wallets and blockchains are linked in a manner that when transactions are verified on a blockchain, the wallet addresses associated with those transactions reflect the same the information. For example, User A sends User B 10 Ether. User A signs over the Ether via the private key and the signature is verified via the public key to User B’s wallet address. After the nodes confirm the transaction on Ethereum, the blockchain ledger will show User A’s wallet address sending User B’s wallet address 10 Ether. User A’s actual wallet balance will lose 10 Ether and User B’s actual wallet balance will gain 10 Ether.

The Bethereum Wallet

Bethereum will eventually provide its users with wallets within the platform, to allow for the feasible buying of Bether tokens and wagering on games. Essentially, the Bethereum wallets will allow users to buy tokens directly from exchanges and then use those tokens to bet on matches. Additionally, users will be able to transfer Bether tokens out of wallets in the same functionality mentioned above (via a private key and a public key) to redeem tokens for fiat currency on exchanges. All wallets will also contain public addresses facilitate smart contracts’ allocation of winnings to appropriate users once a result has been finalized. For now, users can use any ERC-223 or ERC-20 compatible wallet (Bether is an ERC-223 token) to buy, send, and sell tokens. Bether is currently available on CoinBene and the team expects to list the token on more exchanges in the future.

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