2. Understanding Wallets
Your Guide to Wallets
When I first got into cryptocurrency, I lost a few hundred dollars worth of coins because I didn’t understand what wallets or addresses were. I do not want this to happen to you, so let’s take a moment to understand what Litecoin wallets are.
What is a Litecoin Wallet?
If a wallet is where you keep your cash, then a Litecoin (LTC) wallet is where you keep and manage your Litecoins.
To better understand this, I want you to think of your Litecoin wallet like you would your email account. With an email account, you can do various things with it like receive and send emails.
A Litecoin(LTC) wallet is similar in that you can receive and send Litecoins through it as well. Your Litecoin wallet does 5 things specifically:
- It creates private keys.
- It creates public keys derived from the private keys.
- It generates addresses from these public keys.
- It sends LTC by approving transactions. This happens by verifying transactions with a special signature created from your private key.
- It shares, or broadcasts, this information with the LTC blockchain network.
What’s an Address?
If a Litecoin wallet is like a gmail account, then the LTC address is like an email address. Just like how you send you emails to other people’s email addresses, you send LTC to their LTC address.
Above is a screen shot under the “Send” tab of an Electrum-LTC wallet. Here, you would enter the LTC address in the “Pay to” section and then input the amount you want to send. Once you click the “Send” button underneath, your wallet will transfer your LTC to that address.
With that being said, PLEASE MAKE SURE THAT YOU HAVE THE RIGHT ADDRESS before sending your Litecoin. Always double check the LTC address. It will be EXTREMELY difficult, if not impossible, for you to get your Litecoins back if you input the wrong address. Please also keep in mind that the addresses are case sensitive as well.
Sidenote: When you do send Litecoin you have to pay a transaction fee to the people who process your transaction called “miners.” The standard rate is about .001 LTC. You can adjust it to be lower but it will take longer to process and you run the risk of your transaction being ignored completely.
What Are Private Keys?
If a LTC address is like your email address, then a private key is like your password. You can only send emails if you have the right password to log into your account. Similarly, you can only send LTC if you have the right private key to your address.
In the screenshot above, you’ll notice that I input an LTC address and am attempting to send 1 LTC to it. I will now briefly go over what happens exactly inside of a wallet when you push “Send” to demonstrate why private keys are so important.
First, the wallet secretly takes the private key and converts it into a signature. This signature is unique because it can only be recreated if you have the right private key. Then, your wallet signs the transaction with this signature and broadcasts this information to the network so that everyone can confirm that the transaction occurred. In other words, your wallet can not sent LTC without the private keys.
Moving on, as you’ve probably noticed by now, the private keys are kept hidden. This is for your protection so that no one looking over your shoulder can steal it. But it is important to know how to access the private keys in case you ever accidentally delete your wallet or your computer dies. Let’s go over how you might do this in Electrum LTC.
First, click on “Addresses.” When do this, you’ll notice that there is a whole slew of them. All of these addresses are yours and all of them have different private keys. Right click on the addresses you want and then left click on “Private Key” in the drop down menu. Your Private Key will now be revealed. In the picture below, I have selected the top address.
I highly recommend you write down both the LTC address and private keys and put them in a safe place so you don’t lose them. If you ever delete your wallet program, you can recover your LTC by “importing” or “sweeping” your address. However, this is a double edged sword. A thief can also steal your LTC if he knows your private key. For this reason, NEVER SHARE YOUR PRIVATE KEYS WITH ANYONE!
Will I Lose My Coins If I Delete My Wallet Client?
No. Wallets for LTC do not operate like a wallet that stores your cash. If you lose your cash wallet, then your money is gone forever. LTC wallets, on the other hand, act more like your email account. If you delete your wallet then you simply lose access to your coins.
For example, let’s say you need to send a work email but your computer dies. Well you can always hop onto another computer, log in with your email address and password, and then send it.
You can do something very similar if you have your address and private key. Simply hop onto another wallet and recover your LTC by inputting your public and private keys through processes called “importing” or “sweeping” your address.
What Types of Wallets Are There?
There are several types of wallets: Exchanges, Desktop, Website, Hardware, and Paper. I will now briefly go through each option with their pros and cons.
- Wallets on Online Exchanges
- Pros: Exchanges are one of the easiest entry points to buying Litecoin and ideal for day-traders. Some exchanges allow you to tie your bank to it so you can buy LTC with your fiat and often times they will ask you to verify your identity to do so. You can read more about recommended exchanges in “How To Buy Litecoin?”
- Cons: If the company goes out of business, the website is down, or gets hacked, you can lose them forever. The reason for this is because you don’t have control over your private keys, which give you access to your coins. I would not recommend holding LTC on exchanges for a long period of time.
Examples: Coinbase/Gdax, Bittrex, Shapeshift, and Quadrigacx.
2. Desktop Wallets
There are two types of desktop wallets: A) Full Nodes and B) Light Wallets.
A) Full Node Wallet Clients
- To run a full node wallet client, you have to download the entire blockchain onto your computer. The Pros of this is that you support the LTC blockchain network by being another person to validate confirmations. The Cons of this is that it can take up gigabytes of storage and often takes many hours to “sync.” *Syncing means that you are downloading the entire blockchain onto your computers. As a newcomer, you should probably stay away from this option until you feel more comfortable with cryptocurrency overall.
*Side note: In order to back up these wallets, click on file->backup now. It will create a .dat file that you will need to keep if you ever want access to your coins again. This is another way to access your LTC again should you accidently delete the wallet or your computer dies.
Example: Litecoin Core
B) Light Wallet Clients
- The Pros of these wallets are that they’re fairly fast to sync because it uses the blockchain that’s stored online. The Cons is that they don’t isolate your private keys when you are logged into the internet. You can learn more about the dangers of this by reading Chapter 4, “How Do I Protect My Wallet.”
Examples: Electrum LTC, Exodus, Loafwallet (smartphone app where you can buy LTC!).
*Side note: When you create a wallet with Electrum it will give you SEED KEYS. It is important to save the words in the order they’re in or else you’ll never be able to recover your wallet again. Seed keys allows Electrum wallet to recreate your priv keys to recover your addresses. This allows you to recover access to your LTC should you accidently delete the wallet or your computer dies.
3. Website Wallets
- Pros: Easy to set up, doesn’t take space on your computer, and has 0 sync time.
- Cons: If the website goes down or is hacked, you don’t have access to your coins.
4. Hardware Wallets
- Pros: It is a physical device like a USB thumb drive that keeps your coins safe. You simply plug it into your computer through a USB port. The only way to access your coins is through the hardware. It takes 0 computer space, has 0 sync time, and is something you can carry around with you if you want. Read more about the advantages of hardware wallets here.
- Cons: You can only access your coins through your hardware. It costs money and is usually backordered a couple months. If you lose your hardware device, you lose access to your coins. Thankfully, the companies that make these devices give detailed instructions on how to reclaim your coins with seed keys and PIN #’s.
5. Paper Wallets
- Pros: The most secure way of storing your coins. You generate an LTC address through an online LTC address generator and then print it out. Your LTC is now safely tucked away from any internet connection and possible hackers. It would be good to “encrypt” your wallet too. This is another layer of protection that you can add by creating a password to lock up your LTC. Make sure you do this before printing it out and don’t forget your password, or else your LTC will be locked forever. You can and should encrypt your desktop wallets as well.
- Cons: If you lose the paper, you lose your coins. Some people put their paper wallets in the bank. It is also a bit of a hassle to withdraw your coins from them using wallet clients.
- Some wallets allow you to store multiple coins at once such as Jaxx, Coinomi, and Hardware Devices. Make your own educated decisions on where to store your LTC based on the information above. I personally would recommend Electrum LTC for newcomers. But a hardware wallet would be even better if you are willing to spend the money.
- Because cryptocurrency is decentralized, people can have different definitions for different terms. Wallets are one example of this. Some people may refer to only private keys as wallets. Others, both public and private keys. I choose to define wallets in a broad sense to include private keys, addresses, as well as the program clients used to interact with the LTC blockchain.
You now have a firm understanding of wallets and are ready for the next article on how to protect them.
Remember to give me claps to the left, donations below, and share with your friends! Until next time, onwards and upwards. 😁
L.S.C. Donation Addresses
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