Good day everyone,
I hope you are all having a good day, welcome to CryptoGod-1's blog on all things DeFi. Whether you're completely new to crypto or just curious about how a Crypto Wallet works, this article will explain the fundamentals in simple terms.
A Crypto Wallet
A crypto wallet is basically a digital tool similar to many others used in your daily life. It can be an app, a plugin, a software program or even a physical device. A crypto wallet stores your cryptographic keys, which prove your ownership of digital assets and allow you to access and manage cryptocurrency stored on the blockchain. The crypto exists on the blockchain, not in your wallet, so your keys act as proof of ownership and allow you to access your assets.
Cryptographic Keys
Crypto wallets do not actually store cryptocurrency. Instead, they store the cryptographic keys used to access assets recorded on the blockchain. These manage access to your funds and contain two keys.
Public Key / Wallet Address – This can be safely shared with others so they can send cryptocurrency to your wallet.
Private Key - this is a secret key, one which should never be shared. It is a secret digital signature used to digitally sign and authorize blockchain transactions.
Crypto wallets therefore allow users to bypass conventional centralized institutions and give users full control without needing a bank. Users can make peer-to-peer transactions without relying on a bank, while maintaining control over their own funds.
Most non-custodial wallets also generate a recovery phrase (also called a seed phrase), which can restore your wallet if your device is lost or damaged.
Wallet Types
There are a variety of cryptocurrency wallets, which include:
Hardware wallets
Software wallets
Paper wallets
Custodial wallets
Non-custodial wallets
Hot wallets
Cold wallets
Hardware Wallet
This is a physical device which creates and keeps your private keys in an environment which is not connected to the internet. It is called a self custody wallet because it gives the owner full control over their keys. The owner decides when to connect to the blockchain or to remain disconnected from the internet. Transactions are signed on the device itself, meaning your private keys never leave the hardware wallet.
Software Wallet
This is an app which the user installs on their personal device such as a mobile or laptop. It is generally considered a hot wallet as it often remains connected to the blockchain meaning you can send, receive, and manage your crypto at any time (assuming you have internet). They are considered online wallets and because of this they are susceptible to hackers and various threats. It is therefore important to securely back up your recovery phrase offline in a safe location.
Paper Wallet
Paper wallets store your public and private keys on a physical piece of paper. While they keep keys offline, they are now largely considered outdated due to the risk of damage, loss, or improper generation. Hardware wallets are generally viewed as a safer alternative.
Custodial Wallet
This is a wallet which is managed by a third party service, such as an exchange. The keys are held by the exchange, allowing the user to access their public key when sending or receiving crypto while the exchange securely stores the private keys on the user's behalf. It is excellent for beginners, however the downside is that the user is putting all the risk, and all the control, onto the exchange which could potentially face hacks or regulatory pressure.
Non-custodial Wallet
A non-custodial wallet is when you are in full control of your keys. You can approve transactions, sign messages or recover the wallet using your recovery phrase. Users have autonomy from institutions and centralised platforms but the user is also entirely responsible for protecting their private key and recovery phrase.
Hot Wallet
Hot wallets remain connected to the internet, making them convenient for daily use but generally more exposed to online threats.
Cold Wallet
Cold wallets remain offline, providing greater protection against hacking at the cost of convenience.
Choosing a Wallet
Your use of crypto can influence which type of wallet you pick. Whether its security, custody preference, the type of supported currencies, or even platform compatibility, the user needs to consider this before deciding on a wallet.
While most modern crypto wallets support a wide variety of cryptocurrencies, some only support the ones native to their chain. Each wallet has its own benefits and downsides so doing your own extensive research on a particular wallet is extremely important.
Never share your private key or recovery phrase with anyone. Anyone who has access to either can take full control of your cryptocurrency, and blockchain transactions are usually irreversible.
Have a great day.
Peace. CryptoGod-1.
