Breaking Down Ethereum Wallets Options
While we often lump different ways to store Ethereum assets into the single term “wallet”, there are in fact vast differences in many of the solutions. The goal of this article is to summarize the different ways to store and manage your crypto on Ethereum.
What is an Ethereum wallet?
Technically, there are only two types of ways to manage funds on Ethereum: externally owned accounts (EOAs) and contract accounts. These both allow Ethereum users to store ETH, ERC20s and NFTs while also enabling interaction with the Ethereum network.
The above depicts the technicals of the situation but the reality is that underneath each of these solutions are paths to different approaches in wallets. They can be lumped into the following categories:
- EOA software wallets
- EOA hardware wallets
- Single signature smart contract wallets
- Multi signature smart contract wallets
- EOA custodian wallets
EOA software wallets
To date, most accounts created on the Ethereum network fall under the category of externally owned accounts. EOAs are free to generate and after creation the user is given a public key (0x…) that they can use to send and receive funds. To recover an EOA, users are given a private key normally in the form of a 12 word seed phrase. Users must make sure this seed phrase is backed up or not comprised, as it has complete control over the account. Many wallets that deal with EOAs allow users to create and manage as many accounts as they’d like.
Pros: Easily generated, no code risk
Cons: Must protect seed phrase, limited features
Examples: MetaMask, MyCrypto
Externally owned account hardware wallets
Hardware wallets are simply externally owned accounts whose private keys are never exposed to the internet. When a user gets a hardware wallet and generates an account, the keys are generated on device behind a secure enclave. When the user wants to make a transaction, they sign that transaction on the device and it is then broadcast to the network. The private keys are never exposed in the process. While this is a great solution for cold storage, hardware wallets are not as portable or easily accessible as an EOA in your browser.
Pros: Same as EOAs, additional security
Cons: Same as EOAs, slower to access
Examples: Ledger, Trezor
Single signature smart contract wallets (Singlesig)
EOAs are the most popular wallets to date but momentum is gaining for smart contract wallets. Contract wallets are similar to EOAs in that they also have a public and private key but they are based on code which enables a wide range of additional features that externally owned accounts cannot offer. Once deployed, they can enable unique features such as improved user experience, gas fees in different tokens, social recovery options and much more. A singlesig smart contract wallet is one where a single owner has permission over the signing of transactions.
Pros: Better gas UX, improved recovery options, 2FA
Cons: Potential code risk, can be more costly than EOA
Examples: Argent, Authereum
Multi signature smart contract wallets (Multisig)
A multisig is also a smart contract wallet. It can offer the same features as above but requires a minimum number of signatures (people or devices) to approve a transaction before it can occur (M-of-N). If for example you have 3 main stakeholders in your business, you are able to set up the wallet to require approval from all 3 people before the transaction is sent. This assures that no single person could compromise the funds. An individual could also setup a multisig that requires approval from multiple EOAs or siglesig smart contract wallets they may have. Think of a multisig as a smart contract wallet with an additional security measure.
Pros: Same as singlesig, improved security, team management
Cons: Same as singlesig
Examples: Gnosis Safe Multisig
Custodian Wallets
Custodian wallets are another type of EOA, just like hardware wallets. However, in this instance, you are trusting a 3rd party to manage your funds and keys for you. While this goes against the “not your keys, not your crypto” ethos of most of the community, there may be some advantages here for large crypto holders or companies. The biggest of those advantages would be insurance in case of loss.
Pros: Same as EOAs, insurance
Cons: Same as EOAs, not in control of your own funds
Examples: Coinbase Custody
