All You Need to Know About Bitcoin Wallets
Introduction
Cryptocurrencies and blockchain technology have gained widespread adoption globally. People have embraced Bitcoin for its value and core tenets of decentralization and security. However, one problem that has constantly plagued the blockchain space is the poor user experience.
Bitcoin is especially guilty of this user experience issue. Understanding the differences between the existing Bitcoin accounts and finding the right wallets that support each one can be challenging. As a result, most new users would rather trade bitcoins on centralized exchanges, which are generally easier to use, than with self-custodial wallets.
With the recent expansion in the Bitcoin DeFi ecosystem and the influx of people looking for earning opportunities, new users are entering the Bitcoin ecosystem. Yet, due to the lack of clarity and simplicity, new users in the Bitcoin ecosystem struggle to find the right wallets and account types with which they can explore the network and interact with applications. Sometimes, you find a Bitcoin address that begins with ‘1’. Then you find another that starts with ‘bc1’, and it can be confusing.
In this article, we will explore the different types of Bitcoin accounts and their unique characteristics, comparing them to one another to identify their differences. We will also look into wallet applications for the Bitcoin DeFi ecosystem to explore the network and wallets for Bitcoin ordinals and inscriptions.
Legacy
Legacy accounts are the first generation of Bitcoin accounts — which explains the ‘legacy’ ticker. A Bitcoin Legacy address is in the original format used in the early days of Bitcoin before the network ever witnessed any major upgrade. Legacy addresses use a Pay-to-Public-Key-Hash, which ties a specific amount of Bitcoin to a public key.
Legacy addresses usually begin with ‘1’ and have 34 characters without a space. You can find an example of a Bitcoin legacy address below:
157fRrqAKrDyGHr1Bx3yDxeMv8Rh45aUet
In summary, if you want to interact with the oldest iteration of the Bitcoin network, with the original transaction fee structure, a Legacy address is your go-to option. However, transactions cost more when sending Bitcoin with a Legacy account than with others. Also, some Bitcoin wallet applications may not allow you to use a Legacy address by default, so you must choose the option.
SegWit
Segregated Witness, known as SegWit, is another popular type of Bitcoin account format. During the Scaling Bitcoin conference in 2015, Pieter Wiulle introduced SegWit, which he proposed as a solution that could make Bitcoin faster (scale the network) and potentially increase its security.
Implementing the SegWit upgrade made Bitcoin safer. The protocol separates witness data and transaction signatures from data (inputs and outputs). This separation solved the problem of unintentional transaction malleability, stopping potential attackers from being able to modify transaction IDs and hashes.
While SegWit fixed the flaw in the code, it also enabled Bitcoin scaling, paving the way for the Lightning Network to emerge. SegWit also lowered transaction fees on Bitcoin and enabled Schnorr signatures.
SegWit addresses are of two types:
- Nested SegWit: this SegWit address uses a Pay-to-Script-Hash. Nested SegWit brought multisig to Bitcoin. You will incur lower transaction fees when sending Bitcoin on Nested SegWit than Legacy. Addresses on Nested SegWit begin with ‘3’.
- Native SegWit: Native SegWit addresses are in the Bech32 format, a 32-character encoding scheme that helps users identify incorrect characters in their transaction data. Native SegWit addresses begin with ‘bc1q’, and sending Bitcoin from a Native SegWit address incurs cheaper fees than on Legacy and Nested SegWit.
Taproot
Taproot is the most recent upgrade to the Bitcoin network, and it signified a new dawn for the ecosystem, paving the way for DeFi and advanced smart contract implementations. The Taproot upgrade builds on SegWit, so Taproot addresses are an iteration of SegWit addresses.
Taproot was a soft fork of Bitcoin upon its implementation. Thus, it connects back to older network versions like SegWit and Legacy. The upgrade allows the Bitcoin network to group multi-sig and transactions in a batch, improving transaction verification speeds, privacy, and flexibility and enabling Bitcoin scaling. Taproot also supports Bitcoin smart contracts.
A typical Taproot address starts with ‘bc1p’. Bitcoin Taproot also lowers transaction fees on the network.
SegWit vs. Taproot vs. Legacy
Each Bitcoin account has its unique address format. While some wallets may support all three account types through a unified account, others may require creating a separate account. While SegWit and Taproot are upgrades on Legacy, all three Bitcoin account types remain interoperable. Here’s how they compare to one another in some specific areas:
- Transaction fees: Legacy has the highest transaction fees. While fees on Taproot are lower than Legacy’s, Taproot is more expensive than SegWit, because Taproot transactions contain more data.
- Transaction settlement speed: Transactions settle faster on SegWit and Taproot than on Legacy. SegWit also supports batched transactions, unlike Legacy.
- Adoption: As the oldest Bitcoin account type, most Bitcoin wallets support Legacy accounts. SegWit is also widely supported, both Nested and Native. However, some exchanges do not support Native SegWit. Taproot has the least adoption so far, being that it is the most recent of all three account types.
- Potential use cases: Legacy is Bitcoin’s oldest format. Hence, it naturally supports P2P payments and other basic transactions. Bitcoin Legacy has limited smart contract functionality. SegWit and Taproot led to Bitcoin DeFi, smart contracts, and other use cases. Thus, SegWit and Taproot accounts are more suitable for DeFi protocols on Bitcoin.
Bitcoin DeFi Wallets
The Bitcoin DeFi space is rapidly expanding, and as a result, developers have been working tirelessly to come up with new wallet solutions. These solutions are designed to make it easier for the average user to interact with the various protocols that have been built on the network.
By providing these services, developers are able to ensure that the user experience is seamless and that users are able to fully take advantage of the opportunities that the network has to offer.
These wallets are constantly evolving as developers work to improve their functionality and add new features that are designed to make the user experience even better. As such, we can expect to see even more exciting developments in the Bitcoin DeFi space in the coming months and years.
Here are some of the notable Bitcoin DeFi wallets:
Hiro Wallet
Hiro is a Bitcoin wallet that connects to apps built on Bitcoin and Bitcoin L2s. The DeFi wallet is built on Stacks, a Bitcoin L2 solution, and supports several features, making it an ideal wallet for exploring the Bitcoin DeFi space.
Users of Hiro Wallet can store, send, and receive Bitcoin and other tokens secured by the Bitcoin network. With Hiro, you can connect to DeFi apps built on Stacks, buy or mint NFTs, and participate in Stacking to earn Bitcoin.
Hiro Wallet also supports the Ordinals protocol. You can inscribe Ordinals to the blockchain, send, and receive them directly from your wallet. Also, Hiro supports the Bitcoin naming service and is compatible with Ledger hardware wallets. The wallet is available as a browser extension and a desktop app.
XDEFI Wallet
Although it supports different chains (over 30), XDEFI Wallet extends its functionality to the Bitcoin network (mainnet and testnet environments). The application is available on mobile and as a browser extension.
XDEFI is a typical DeFi wallet, allowing you to connect to decentralized applications built on Bitcoin. Also, XDEFI is partnering with Zetachain to bring omni-layer smart contracts to Bitcoin (currently in the testnet stage). The application boasts about 190,000 users and has a simple user interface.
XVerse Wallet
Another popular DeFi wallet for the Bitcoin ecosystem is XVerse. The app claims to be the most advanced Bitcoin wallet. Based on its available features and future releases, that claim is not far-fetched. XVerse is available on Android and iOS and as a browser extension.
XVerse is built on Bitcoin and supports the most significant aspects of the Bitcoin DeFi ecosystem, from Stacks to Ordinals and BRC-20. With XVerse, users can participate in Stacking on Stacks, trade NFTs, inscribe and interact with Ordinals, and trade BRC-20 tokens.
Besides these wallets, there are several other wallets, such as Opto Wallet, Neptune Wallet, MultiSafe, and D’CENT Wallet.
Wallets for Ordinals and Inscriptions
Ordinals and inscriptions are a recent development, dating back to January 2023. The Ordinals protocol allows Bitcoin node operators to inscribe data to each Bitcoin Sat, potentially creating NFTs on Bitcoin. Since January, Bitcoin Ordinals have generated a lot of buzz in the Web3 space, drawing both praise and criticism from various sources.
Although Ordinals are not exactly NFTs, they represent a complete form of non-fungible tokens, as all data is inscribed in the blockchain. NFTs, on the other hand, rely on off-chain systems to store some of their data. Currently, there are three ways to own an Ordinal:
- Run a node and inscribe it yourself.
- Buy an existing Ordinal from its owner.
- Use an Ordinal inscription service like Gamma.
It’s important to note that not all Bitcoin wallets support Ordinals and inscriptions. Some of the prominent Ordinal wallets include Ordinals Wallet, Hiro, and XVerse.
Conclusion
In conclusion, it is of utmost importance to understand the differences between the three types of Bitcoin accounts in order to fully engage with the Bitcoin network. By comprehending the nuances of each account type, users can make informed decisions when it comes to choosing a wallet that best suits their needs.
It is worth noting that the Bitcoin DeFi ecosystem is constantly evolving and expanding, which means that staying up-to-date with the latest developments and trends is crucial for anyone who wishes to remain relevant in this space.
This article was first published on Velar Blog. To learn more about Velar Protocol, join our community on Discord or follow us on Twitter.
