What is a Wallet

Armed with your knowledge of blockchain technology, smart contracts, and cryptocurrencies, you might be wondering where you can keep your funds. If it doesn’t go to the bank, where does it go? For your digital funds, you will need a digital wallet. In this lesson, we take a look at how wallets work and the different types out there.

A crypto wallet can be compared to your online bank account, but for cryptocurrencies. With a wallet, you can interact with blockchain networks, access your funds, and perform transactions. However, unlike an online bank account, crypto wallets are not backed by the government and you are always in control of your funds.

You can view these wallets as a door to the crypto world. By having a wallet, you can access plenty of products and services.

It’s important to understand that your crypto wallet does not store your cryptocurrencies in the same way that your physical wallet holds your cash. Cryptocurrencies are bits of data that are stored in many places in a database. The wallet then finds all of the bits associated with your wallet address and sums up the amount for you.

Wallet Address

Once you have set up your wallet, you will have a string of numbers and alphabets that is unique to your account. This is known as a wallet address and it usually looks like the image below.

You can then send and receive cryptocurrency from your wallet through different methods. Most typically, you will need to enter the recipient’s wallet address, input the amount, and sign the transaction with your private key. There are also transaction fees that you will need to pay. Make sure to learn how to safely perform transactions with the wallet of your choice.

Public and Private Key

The wallet address is also sometimes referred to as a public key. It is meant to be shared with others so they can send funds to you. Think of it as your bank account number.

Each public key, or wallet address, is paired with a corresponding private key. This private key acts like your bank account password or ATM pin. You need to ensure that this is kept privately and securely. If anyone gets ahold of your private key, they can then access your wallet and funds. The public and private keys are used together to encrypt and decrypt data.

When looking for a wallet, you will come across many different types of wallets. It might seem confusing but we are here to help break it down. By understanding how each wallet works, you can decide which is the best option for your needs.

Custodial vs Non-custodial Wallets

Firstly, there are two main types of wallets, custodial and non-custodial. A custodial wallet is hosted by a third party that holds your keys and can access your funds. This is usually the case for a centralized exchange such as Binance or FTX. These wallets are considered convenient and easy to use for beginners. However, you will need to trust the platform to securely store your funds.

Meanwhile, a non-custodial wallet will put you entirely in charge of your funds and give you the responsibility of securing your keys. It is best suited for those who prefer to have full control over their funds.

Software Wallets vs Hardware Wallets

Wallets can also be categorized as software and hardware wallets. These might sometimes be referred to as hot or cold wallets. A hot wallet requires an internet connection while a cold wallet has no connection.

A software wallet is usually a computer program or mobile application that holds your private keys online. Web-based wallets such as MetaMask work as a browser extension. A desktop wallet can be connected and used on a desktop or laptop while a mobile wallet allows you to perform transactions from your phone.

On the other hand, a hardware wallet is a small physical device that stores your crypto offline. It generates and stores your private keys without connecting to the Internet. These wallets are widely considered to be more secure but require more effort.

When you first set up your wallet, it will generate a group of random words that is unique to your account. It is different from your private keys but both would allow an intruder to access your wallet. This string of random words is known as a seed phrase and it is crucial that you keep a record of your seed phrase.

A seed phrase allows you to regain access to your wallet and funds if anything were to happen. If you lost your phone/laptop or your hardware wallet broke, you can use the seed phrase to set up a new wallet and regain complete access to your funds.

The best practice is that you write down your seed phrase on a piece of paper or in a book and store it in a safe place. Some people even keep copies in multiple places. Make sure that your seed phrase is sheltered from environmental risks such as fires, rain, or floods.

A crypto wallet is your gateway to the crypto space. With a wallet, you can access your funds, perform transactions, and interact with the blockchain. There are many types of wallets available and you will need to do your research to determine the best option. Above all, make sure that you are taking the necessary precautions to keep your wallet and funds safe.

You should be able to answer all the questions below. If you are having trouble answering any of them, go back and review the lesson & the external content.