What Is a Decentralized Crypto Wallet?

What Is a Cryptocurrency Wallet?

If a regular bi-fold wallet holds dollar bills, a crypto wallet holds cryptocurrency, right? Not quite. Cryptocurrency, like Bitcoin or Ethereum, is actually stored on the blockchain, which is a big decentralized database.

In order to access your wallet, you need private keys that “unlock” the location of your cryptocurrency on the database, so that you can use it for transactions. Your private keys are what give you access to your wallets, and thereby, your assets.

In short, a crypto wallet is an application that allows you to store, manage, and send your digital assets. Which kind of wallet you choose for your cryptocurrency depends on several factors, however. Here’s what you need to know about crypto wallets to help you decide which type is best for you.

What Is a Centralized Wallet?

Most people enter the cryptocurrency market by using a centralized, or custodial crypto wallet. That means storage and custody of your cryptocurrency is managed by a third party, like Coinbase, or any of the dozens of others out there.

The third party knows your private keys, and will send, receive, and store cryptocurrency on your behalf. This arrangement works much like a traditional bank account: the bank holds your money, and you can access it, but you don’t have keys to the vault.

Centralized wallets are popular and convenient, but some cryptocurrency users find the third-party involvement unnecessary, or worse, a threat to the security of their investment. The truth is that centralized cryptocurrency wallets offer varying levels of security, so it’s important to understand all the features and drawbacks of any third-party company you consider. But if you want ultimate control of your digital funds, you’ll be better off with a decentralized wallet.

What Is a Decentralized Wallet?

A decentralized wallet, or personal wallet, is just what it sounds like: a crypto wallet you manage and maintain yourself. Decentralized wallets aren’t provided by a crypto service or financial institution. Instead, they exist on your computer or removable drive, cutting third-party services out of your transactions altogether.

It’s safe to say that decentralized crypto wallets aren’t really for beginners, as you’ll need a certain level of expertise to maintain them securely. But chances are, the more you get into cryptocurrency, the more appealing decentralized wallets will become. Here’s what you need to know to get started:

Decentralized wallets allow pure peer-to-peer digital transactions: Skipping a regulatory body and transacting peer-to-peer is kind of like the digital equivalent of paying in cash. In other words, the transaction can be truly private. This type of transaction over the internet was impossible before the advent of the first cryptocurrency.

The ability to transact peer-to-peer is important for several reasons, but security and independence top the list. For one thing, involving a third party inherently increases security risks. After all, breaches and hacks are a fact of modern life.

In addition to this, peer-to-peer transactions help eliminate the threat of corporate or government financial surveillance. Simply put, advocates of decentralized wallets don’t want Big Brother monitoring their every financial move.

Types of crypto wallets, known as “hot” and “cold” wallets, offer different levels of utility and security: Hot wallets are managed online. That means they offer both the convenience and security risks of internet access.

Personal hot wallets are known as online personal wallets. With these, an online company hosts the wallet software, but not your private keys. That gives you the ease of using the software features, while retaining ultimate control of your assets.

Essentially, hot wallets are useful for basic transactions, but may not be the best place for your entire stash. You can think of them like traditional wallets: you don’t carry your entire bank balance around, but you might have some bills available for transactions.

The most secure way to store digital assets is with a cold wallet. Also known as hardware wallets, cold wallets aren’t connected to the internet and therefore can’t be accessed as easily.

Bad actors trying to get their hands on the cryptocurrency stored in a cold wallet would need physical possession of the device itself, along with PIN numbers, passwords, and other security measures. This also means cold wallets are less convenient for you to use, too, since they require a few more steps to go from storage to transaction.

The reality is that you’ll probably end up using a combination of hot and cold wallets, so that you can strike the right balance between security and function.

Yes, decentralized wallets are legal, but they may be facing increased regulation: Decentralized wallets have come under recent scrutiny for being too easily used for illicit purposes. But the assumption that crypto is for criminals just isn’t true. In fact, some argue the percentage of illicit activity in the traditional financial system is higher than in the digital asset system. What’s more, there’s evidence to suggest that law enforcement is getting pretty good at identifying and stopping digital criminal finance activity in its tracks. Advocates of keeping decentralized wallets believe that added rules and regulations will stifle innovation and infringe on civil liberties, among other negative consequences.

Still, agencies like the U.S. Financial Enforcement Crimes Network (FinCEN) have shown interest in imposing rules like identification requirements and amount restrictions on transactions involving decentralized crypto wallets. For now, though, you and your decentralized wallet can freely move about the cryptocurrency ecosystem.

Which Wallet Is Right for You?

Which crypto wallet is right for you depends on a number of factors, including security, usability, and your level of expertise. Here are a few worth looking into:

Ledger Nano X: Ledger is a hardware wallet that lets you connect to your computer or mobile device to move or use your cryptocurrency. A popular option for several years, Ledger Nano X supports more than 1,800 cryptocurrencies. With Ledger, you get the security of the cold storage wallet and the convenience of the Ledger Live software for portfolio management.

Trezor Model T: Another cold storage wallet pick, Trezor Model T offers a user-friendly touch screen and a MicroSD card encryption option. Its ability to access third-party exchanges, like CoinSwitch and Changelly, provide added convenience. The Trezor Model T supports over 1,600 cryptocurrencies.

MyEtherWallet: MyEtherWallet is a free, open-source platform that’s been around since 2015. Not technically a crypto wallet by itself, it is designed to allow users to create crypto wallets that operate on the Ethereum network. With MyEtherWallet, your crypto wallet is stored directly on your computer, not on outside servers. According to Best BitCoin Exchange, this helps you eliminate the “security vulnerabilities of housing Ethereum in a web-based wallet.”‍

Whether you’re new to cryptocurrency or already consider yourself a veteran investor, it’s smart to keep an eye on decentralized wallet options, as well as new rules and regulations for digital currencies. No matter how the cryptocurrency world evolves, you’ll want to be sure your assets are secure and accessible.