What are Crypto Wallets
Before we get into the concept of ‘Crypto Wallets’, I would like to ask you:
“How do you store your real world cash?”
The example of our traditional wallets might be a cliche but they are a perfect example to understand crypto wallets. Coming to the question, Wallet also called as a purse is where we store our money. It makes us feel safe. A ‘Crypto Wallet’ works exactly with the same principle but in a totally different way.
A Crypto Wallet is a wallet in an app that allows its users to store and transact their cryptocurrencies over the blockchain network. The core architecture of the crypto wallet encircles maintaining the private and public keys for the cryptocurrencies to validate their ownership with the owner.
In other words, crypto wallets are the keys of the blockchain network. Without the integration of crypto wallets with the blockchain technology, there would not be any authentic validation for the ownership of the crypto assets or mapping the cryptocurrencies to their respective owners.
The blockchain ecosystem got its first crypto wallet in the year 2009 with the release of the bitcoin protocol. However, these wallets are not restricted to bitcoins only. They allow users to hold multiple cryptocurrencies ranging from Ethereum (ETH) to Ripple (XRP), Litecoin (LTC) and many more. Since crypto wallets have such adverse user applicability, let’s just dive deeper into the working of crypto wallets and understand their role in the DeFi world.
How do Crypto Wallets work?
Millions of people today are using crypto-wallets. However, there exists a considerable amount of misunderstanding about how they exactly work. Unlike our wallets (purses), crypto-wallets do not store any currency in them.
The information they store is the addresses and keys used to locate and access cryptocurrencies stored at variable locations across the blockchain ecosystem. These locations are nothing but different blocks in the blockchain. Each and every crypto wallet present across the global ledger has a unique cryptographic public ID that acts like a bank account number. It’s completely safe and healthy to share your crypto wallet ID with people across the network for transactions because that just represents your ID or your public key over the network.
Whenever a person tries to send the digital currency to anyone, what happens in the underlying scenario is the sender signs off the ownership of the assigned amount of currency to the recipient. To transact these cryptocurrencies, the private key on your wallet should match the public address of the currency.
The balance with the sender and the receiver change respectively with the successful matching of the private key and public address of the cryptocurrency.
No physical exchange of assets is done via crypto wallets as only the transaction records are exchanged across the blockchain network meaning that a change in ownership of the cryptocurrencies present inside particular blocks represents the transaction.
So, now that you know the function of a crypto wallet, let’s take a look at different types available of crypto wallets in the market.
Types of Crypto Wallets
The introduction of numerous cryptocurrencies in the crypto sphere has led to an abundance of crypto wallets in the market.
At a very high level, there are two types of crypto wallets — custodial and non-custodial.
Custodial wallets eradicate the risk factor of losing one’s private key or passwords as a third-party is in control of the wallet. On the other hand, the non-custodial wallets are completely decentralised. Choosing the right cryptocurrency wallet depends upon various factors such as ownership, transaction type, and security.
However, to assist you in making an informed decision, we have cut down the wallet types under some broader categories mentioned below:
Desktop Wallet
The wallets that are downloaded and accessed onto a particular machine (computer or PC) are termed as Desktop Wallets. They offer a great mix of convenience and security to the users. However, if the machine is compromised, the control over the wallet and its assets can fall in the hands of a malicious person. In such situations, users can end up suffering great financial losses.
Web or Online Wallet
These are the wallets that are available on the internet, offering the greatest level of convenience to the users. However, they are the least secure among all wallets. This is because the entire control of one’s crypto assets lies with the wallet provider too. At the time of any data breach or cyber-attack on the wallet provider, the entire data, and the cryptocurrencies may get exposed to the fraudulent parties. Whereas, the best practice while using such wallets would be to store small chunks of cryptocurrencies with a wallet provider.
Mobile Wallet
Mobile wallets are similar to the Desktop wallets with the difference being in their platform of application. These wallets are installed and used on mobile devices (iOS and Android). The user has to download the particular wallet app for his/her device and can use that wallet by creating or logging in to the app. These kinds of wallets have an added advantage to spend or receive cryptocurrencies just by scanning a QR code.
Hardware Wallet
If you want the utmost security, Hardware wallets are what you should prefer. The unparalleled level of security provided by these wallets is its main highlight. A physical device that stores the private and public keys within its hardware is used to access the cryptocurrencies over the blockchain.
The device bridges itself to the internet only at the time of completing a transaction. Moreover, the user has to enter the private pin onto the device itself, making it entirely hack-proof.
Paper Wallet
These are one of the most underrated crypto wallets available in the market. The user just has to pen down all the public and private keys manually onto the paper. The keys are not at all stored on the internet and the users have to type off the keys whenever required during transactions over the web wallets or websites.
The entire functioning can be simplified even more, just by printing your QR code onto the paper. Whenever you want to do the transaction, you can simply scan the QR code to provide your public and private keys.
However, the only loophole of paper wallet is that if the owner gets the document misplaced or stolen by someone else, they can incur huge financial losses.
Final note
Crypto wallets are playing a vital role in building a new global economy based on blockchain technology. According to the global market researchers, the use of crypto wallets will surpass the traditional wallets in the next few years.
Based on the research, it can be concluded that crypto wallets are way more secure than the physical wallets and that too at such nominal costs. No matter the use case, crypto wallets have allowed the seamless integration of cryptocurrencies, facilitating the adoption of DeFi around the globe.
