What’s a Crypto Wallet?
— Private keys define your ownership of your crypto assets. But they can be difficult to manage and to secure.
— Anyone can access the blockchain address once they know the private key. Hence keeping it secure is non-negotiable.
— A crypto wallet secures your private keys and allows you to manage your blockchain assets
— In this article we give you an overview of crypto wallets and how they work.
We’ve already covered one very important crypto topic in the previous article – the private key. And now you know this, figuring out how to manage the private key is the logical next step.
In the present article, let’s deep dive into how different crypto wallets protect your private keys, and which type of wallet is your most secure option.
Why do you need a crypto wallet?
Before understanding the need for crypto wallets, let’s get a little more technical about your private key.
A private key, in raw form, is a scary-looking string of 256 1s and 0s generated by the blockchain you’re using. Technically, it’s difficult for you to remember this number. So, it’s obvious to think about writing it down. But storing a private key in written format is both risky and impractical. Let’s see why.
Private keys are long
Can you imagine inputting 256 digits every time you wanted to transact? This is painstaking, and the chances of making a mistake are very high. This makes a written form an impractical way to store your private key.
Private keys are difficult to secure
Writing your private key down and keeping it in a place that’s accessible to transact is an insecure way to store the private key. All it takes is one person to see this number, and all your crypto is gone. And what if you have multiple crypto accounts? You’d need to write and store the private key for each one, amplifying the chances of somebody seeing this precious piece of information.
You might think of storing your private key in a document on your PC or computer to keep it safe. It would be easy to store and then simply copy and paste it for accuracy. However, it’s also not the best way to store your crypto. Remember, any device that is connected to the internet is at risk from hackers and malware. This means that storing your private key on your device also makes it vulnerable to hacks.
Security essentials for private keys
To summarize, you need a secure way to store your private key. This solution should be capable of managing multiple keys at once, and must allow you to transact without ever revealing the keys themselves. This is exactly what a crypto wallet does efficiently.
What is a crypto wallet?
A crypto wallet has two main functions:
- It secures and conceals your private keys
- It’s your dashboard for communicating with the blockchain and managing your assets
There are different kinds of crypto walle t: some are software, others are digital. Some – like exchange wallets – are custodial, which means you don’t control the private keys, instead you trust someone else to do that on your behalf; and others are non-custodial, which means you have sole control of the private keys.
Each kind of wallet has different strengths and weaknesses, but we can broadly understand the options by asking one key question – does the crypto wallet store your private keys online or offline ?
Let’s look at your options.
A software wallet is a piece of software that stores your private keys digitally within the software -normally on your computer or phone. These wallets are also known as hot wallets. You can install a software wallet on your mobile device, PC, or laptop.
Software wallets tend to be very easy to use: since the wallet is online within your device, you can access it instantly. This makes them very attractive for beginners.
However, there are also a few drawbacks. Any device connected to the internet is vulnerable to hacks deployed through the internet connection. In other words, your private keys can be targeted if you are using a hot wallet on your phone or computer.
So although hot wallets are a very convenient means of storing your private keys, they can never fully secure them from online threats and hacks.
On the other hand, a hardware wallet is a physical device that stores your private keys in an isolated environment. Hardware wallets are also called “cold wallets.” The advantage of using a hardware wallet is that it operates in an offline environment, away from the internet and its associated threats.
However, hardware wallets can be less convenient in terms of accessibility, since you need to physically approve transactions each time you interact. Nonetheless, when compared to software wallets, they provide a far greater level of security since they cannot be hacked.
How to secure your crypto
Let’s do a quick review: a crypto wallet is a place for securing your private keys and interacting with your crypto assets.
To determine how secure your crypto is, you should ask yourself two questions:
- Do I own the private keys?
- Are those keys stored offline?
If you want to know your crypto is truly secure, the answer to both these questions must be yes.
Ownership and security: the canons of crypto
Since we’ve covered what a crypto wallet is and how they work, you are in a good position to decide how to manage your own crypto assets. But before you do that, we need to discuss one final point.
Crypto is all about putting you in charge: it gives you access to your assets without any restrictions and removes middlemen from the equation. But if you need your wallet to access your funds, doesn’t that make the wallet provider a middleman?
In the following article, we’ll talk about something called a secret recovery phrase. It makes sure that the control of your crypto stays with you, not your wallet provider.
By this time, you’re already many steps ahead of most people in learning the crypto space. That’s a pretty good state for exploring Web3. In the following article, we’ll discuss how to stay in charge of your crypto, no matter the wallet you’re using. See you!