The Blockchain Wallet: What Is it and How Does It Work?
The inception of blockchain technology gave rise to many innovations. It brought new waves of developments that are revolutionising every sector and the world’s economy at large.
E-wallet is one such innovation that blockchain made possible. Today, users can store, manage and trade digital assets seamlessly with their wallets. Every time you want to access your cryptocurrency, all you need to do is sign in with your private key, which is like an electronic signature.
In simple terms, a digital wallet gives you access to your cryptocurrency. A wallet generates a seed phrase or recovery seed, which is usually 12 or 24 randomly generated words. Those words form a unique combination like a password that you can use to prove ownership of your coins. With these words, you can gain access to your coins from any kind of wallet.
What is a Blockchain Wallet?
A blockchain wallet is a software or physical device that enables users to send, receive and store different kinds of cryptocurrencies, such as; Bitcoin or Ethereum. It allows people to exchange funds easily because transactions are secure, as they are cryptographically signed.
It is a cryptocurrency wallet that stores private and public keys and interacts with various blockchains to enable users to send and receive digital currency and monitor their balance.
To elaborate, blockchain wallets are safe because your data is encrypted. This means that if someone were to hack into a server, they may find it difficult to steal any of your information or money or anything else stored there.
However, there are flaws outside the blockchain that give criminals access to your funds. Hackers can access cryptocurrency owners’ exchange accounts and wallets to take their digital cash.
Public and Private Keys
Whenever you create a blockchain wallet, you are provided with a private key and a public key that is associated with your wallet for cryptocurrency transactions. The public key can be shared with other people.
The public key is like the email address that you share with anyone to transfer, sell or buy cryptos, while a private key is like a password that enables you to sign in to your wallet and access it.
Infact, you can receive or send cryptocurrencies or fiat currencies using your public key, which serves as your wallet address. The private key, on the other hand, cannot be shared with anyone, it functions as your ATM PIN and gives you access to your assets.
Wallets have many public keys. This means that you can give out multiple public addresses and use them to receive crypto to the same wallet.
Types of blockchain Wallets
There are two distinct types of blockchain wallets: software and hardware wallets.
Software wallets are referred to as ‘hot wallets’ because the funds are kept online, whereas hardware wallets are called cold wallets, and funds are kept offline. One essential difference between them is that while software wallets are non-physical, hardware wallets are physical devices that are like flash drives and other storage devices.
Software Wallet: Software wallets are the most commonly used wallets presently. They are online wallets that are connected to the internet and store users’ private keys on a computer or mobile device.
Software wallets can be custodial or non-custodial. Custodial wallets are usually managed by crypto exchanges like LBank or wallet custody firms. It is the most popular type of crypto storage system because of its ease of use and the fact that the responsibility of safeguarding a user’s funds falls on the platform and not the individual.
Since the exchange safeguards your funds and keys, it becomes easy to retrieve your portfolio whenever you forget or lose your keys by following the platform’s password reset guidelines.
A non-custodial software wallet, on the other hand, gives users full control over their private keys and the sole responsibility of protecting their holdings. For example, a crypto exchange that offers non-custodial wallets allows you to own and hold your own private keys. But forgetting or losing your password may result in losing all funds forever.
Hardware Wallet: A hardware wallet keeps your keys off of your phone or computer. However, they are slightly more complicated to use than software wallets. Software wallets are unique to each cryptocurrency, while hardware wallets often support multiple currencies.
As they shield your private keys from the Internet, hardware wallets are frequently referred to as cold storage because they reduce the likelihood that your assets will be exposed in an online attack.
A PIN and an optional passphrase are used to protect your private keys that are kept in the hardware wallet. It’s quite tough for a criminal to remove your keys from your hardware wallet if they manage to get hold of it. The keys are never made available online, making them impossible to steal. It is called cold storage for this reason.
Software and hardware come with many advantages and disadvantages. It is only right for users to conduct intensive research on both to determine which of them best suits their needs.
Since hardware wallets are expensive, it is most preferred by crypto users with a large portfolio of digital assets and the capacity to protect their own funds. Whereas, software wallets are preferred by users who do not want to shoulder the responsibility of protecting their private keys.
Disclaimer: The opinions expressed in this blog are solely those of the writer and not of this platform.