Every Virtual currency has a means through which it is stored, transactions are carried out with it and records of these transactions are stored and easily accessible. A cryptocurrency wallet is such a tool that allows for the storage of cryptocurrencies as well as perform other activities relating to the use of cryptocurrencies.
Cryptocurrencies are built with blockchain technology, therefore all transactions and activities relating to any cryptocurrency are done through the use of blockchain technology. One of the main functionality the blockchain in terms of cryptocurrencies is the transfer and storage of these cryptocurrencies, since the blockchain is just a record of these activities and these records of these activities are mostly written in codes, it becomes important that tools are developed to interact with the blockchain and translate these codes into understandable languages for the end users. A cryptocurrency wallet is one of those tools developed to achieve this aim.
It is therefore okay to say that cryptocurrency wallets are tools developed to help users interact with a blockchain easily in a bid to understand properly and carry out activities such as storage, transfer of cryptocurrencies as well as other activities that will require an interaction with the blockchain. It must be understood that cryptocurrency wallets do not store cryptocurrencies, they just aid to generate the necessary information that enables users to send and receive cryptocurrencies via various interactions with the blockchain.
There are two very important strings of information cryptocurrency wallets help to generate namely: Public Keys and Private Keys
Public Keys(Cryptocurrency Wallet Address)
A public key which is mostly referred to as a cryptocurrency “address” is usually an alphanumeric identifier used to describe a “location” on the blockchain which a cryptocurrency can be sent to. The wallet address can be likened to the account number system used in banks where it is possible to give your account details to anyone and fiat currencies can be sent to that account through the provided information. In that same way cryptocurrency wallet addresses are public and can be shared with anyone to receive cryptocurrencies.
Just as bank accounts are used to receive a certain type of fiat currency, cryptocurrency wallet addresses are meant to receive certain types of cryptocurrencies. A cryptocurrency wallet address generated from another blockchain can not be used to receive a cryptocurrency from another blockchain. For example, you cannot send Bitcoin(BTC) to an Ethereum(ETH) wallet address because they are totally different blockchains. Cryptocurrencies that share the same blockchain can utilize the same wallet addresses; an example will be the case of an ETH wallet address being used to receive Uiswap protocol token(UNI) because UNI shares the same blockchain with ETH.
Private keys can be said to be passwords to your cryptocurrency wallet address, the private keys are what gives access to your cryptocurrencies and this access happens regardless of the type of wallet used or who has access to it. Private keys are not meant to be public like wallet addresses but rather private and known to only the owner of that wallet address.
Private keys mostly come in the form of alphanumeric identifiers just like addresses but they can also come in the form of random words mostly referred to as “seed phrases”. Whatever form the private key to your wallet comes in, the most important things to note about private keys are:
- Private keys give access to the cryptocurrency wallet and by extension your cryptocurrencies on that wallet address.
- Private keys are meant to be private to the owner of the wallet address it belongs to.
- As the result of the decentralized nature of the blockchain, private keys are not stored anywhere and therefore if misplaced can never be retrieved.
Types of Cryptocurrency Wallet
There are various types of cryptocurrency wallets available currently, these wallets are divided into hot and cold wallets depending on their working mechanism. They can also be classified into software, hardware and paper wallets. We will be explaining each of these with examples to help you understand better.
Hot Cryptocurrency Wallets
Hot cryptocurrency wallets are wallets that can be accessed using the internet. This type of wallet allows you to gain access to your crypto funds while only connected to the internet. For example, to set up a wallet on Binance, you will need an internet connection. The hot wallet makes it easy for users to set up and gain access to funds more quickly.
Cold Cryptocurrency Wallets
Cold wallets on the other hand refers to cryptocurrency wallets that do not require access to the internet to be functional. This type of wallet is more resistant to online hacking activities because they utilize a physical medium to store the keys to the wallet offline. Cold wallets are particularly suitable for people who do not trade their cryptocurrencies actively.
Software Cryptocurrency Wallets
Software wallets are types of cryptocurrency wallets that are mostly connected to the internet for them to function properly. They are the most widely used form of cryptocurrency wallets available currently as there are more active cryptocurrency traders and users than there are passive traders and users.
Software wallets can be divided into three:
- Web Cryptocurrency Wallets: Web wallets are types of software wallets that let you interact with and carry out activities on the blockchain through a browser interface. To use a web wallet, you usually do not need to download any software on your private computer. Many cryptocurrency exchanges such as Binance are web wallets; most web wallets do not give users access to the private keys of the wallet address they operate on the exchange. Examples of web wallets are Blockchain wallet, My Ether Wallet etc.
- Desktop Cryptocurrency Wallets: A desktop wallet is a type of wallet which requires you to install software on your computer to be able to carry out cryptocurrency transactions. This type of cryptocurrency wallets usually contain private key information of the wallet address operated by the user of such wallet. Example of a desktop wallet is Metamask.
- Mobile Cryptocurrency Wallets: Mobile wallets are also a type of cryptocurrency wallet that operates like desktop type of software wallets but in this case are only available for usage on smartphones. They mostly give you access to your pirate keys to the wallet address operated and help you interact conveniently with the blockchain to carry out various activities. Examples of mobile wallets are Trust wallet, SafePal, Imtoken, TokenPocket. Some web wallets as well as Desktop wallets such as the Blockchain wallet, Binance and Metamask also have mobile wallet features.
Hardware Cryptocurrency Wallet
A hardware type of cryptocurrency wallet is a form of cold wallet, it is a physical device which uses what is called a Random Number Generator mechanism to create a wallet address and its associated private key. This information is stored on a device which isn’t connected to the internet.
Hardware wallets offer a higher level of security than software wallets which are more prone to online attacks either due to malicious malware or phishing activities by black hat hackers.
There are various available hardware wallets available today that can help you safeguard cryptocurrencies, examples are the Ledger wallet, Nano S, Nano x etc.
Paper Cryptocurrency Wallet
A paper wallet refers to a piece of paper where vital crypto information such as address and private keys are printed physically out in the form of QR codes. These codes can then be scanned in a bid to carry out different cryptocurrency transactions.
Private Cryptocurrency Wallet Address VS Exchange Wallet Address
Private wallet cryptocurrency addresses are wallet addresses in which users have control over through access and ownership of their private keys. Private keys as we have noted earlier gives access to cryptocurrencies in a certain wallet address no matter who has access to it and what wallet it is logged in on.
On the other hand, exchange wallet addresses are the types of wallet addresses provided by a cryptocurrency exchange, these types of addresses mostly have their private keys information managed by the exchange and not the user. Exchange wallet addresses are used to hold and show details about a specific cryptocurrency and not another type of cryptocurrency even if they share the same blockchain.
For example, if you send UNI tokens to the ETH wallet on your Binance account, you would not have access to your UNI tokens because that is an exchange wallet specifically for ETH even though UNI token shares the same blockchain with ETH.
Cryptocurrency Wallet Security
When dealing with cryptocurrency, it is important to be always conscious of the safety of your assets, there is no straight line path when it comes to security. Although what you must know is that there are always black hat hackers waiting to gain access to your wallet address and steal your cryptocurrency asset from you.
One way to ensure safety of your cryptocurrency assets is to at all times keep details of your private keys solely to yourself and not share it with a third party. Large amounts of cryptocurrency assets should not be kept on exchanges as most exchanges are susceptible to online hacking attacks which may lead to you losing your assets. Also cryptocurrency exchanges do not allow you access to your private keys information and as such funds are not really your own.
You must be careful of the type of wallet applications and software you use as most of these come with malicious malwares that may secretly steal important information from you. You should also be careful of the sources of download for the various applications you use.
Security is said to be an illusion therefore there is no full course on how to be 100% safe while dealing with cryptocurrency, it is therefore necessary to keep updating your security measures regularly to ensure that your crypto assets are safe at all times.