Like a physical wallet for storing money and other documents, a cryptocurrency wallet is an essential tool to interact with a blockchain network. There are several types of crypto wallets, which are classified into three main classes: software, hardware, and paper wallets. Based on their working mechanisms, they can also be referred to as hot or cold wallets.
Most crypto wallet providers offer software wallets since they are convenient and easily accessible compared to hardware wallets. But, hardware wallets seem to be the most secure alternative. On the other hand, paper wallets comprise a “wallet” printed out on a piece of paper.
How crypto wallets work
Contrary to popular belief, cryptocurrency wallets do not indeed store digital assets. Instead, they offer the necessary features to interact with a blockchain network. In other words, these wallets generate the information needed to send and receive cryptocurrency through blockchain transactions. Among other things, such information comprises one or more public and private keys.
The wallet also has an address, which is an alphanumeric identifier generated based on the public and private keys. An address is defined as a specific “location” on a blockchain where coins are sent to. This implies that you can share your address with other people to receive funds, but you should never reveal your private key to anyone.
A private key gives access to your digital assets, regardless of the type of wallet you use. So when your device gets compromised, you can access your funds in another device, as long as you have the corresponding private key/seed phrase. Therefore, coins never truly leave a blockchain network; they are simply transferred from one address to another.
Hot and cold wallets
A hot wallet refers to a wallet that is connected to the internet. For instance, when you create an account with Tokenizer and send coins to your wallet, you are depositing into Tokenizer’s hot wallet. Hot wallets are easy to set up, and the funds are quickly accessible, making them convenient for traders and other frequent users.
On the other hand, cold wallets are not connected to the internet. Instead, they use a physical medium to store the keys offline, making them resistant to online hacking attempts. As such, cold wallets tend to be a much safer option of “storing” your digital assets, and are particularly suitable for long-term investors.
There are several types of software wallets, each with its unique features. Most of them are connected to the internet. These are the most common software wallets:
Web wallets are used to access blockchain networks through internet browsers, and they do not have to be downloaded or installed. They include exchange wallets and other browser-based wallet providers.
As the name suggests, a desktop wallet is a software you download and run locally on your computer or laptop. Unlike some web-based versions, desktop wallets give users full control of their keys and funds.
Mobile wallets resemble their desktop counterparts, but they are designed particularly as smartphone apps. They are quite convenient since they enable users to send and receive digital currencies via the use of QR codes.
Hardware wallets are physical, electronic devices that use a random number generator (RNG) to create public and private keys. The keys are then kept in the device itself, which is not linked to the internet. As such, hardware storage is classified as a cold wallet and is labeled as one of the most secure alternatives.
Though these wallets provide higher levels of security against online attacks, they may be risky if the firmware implementation is wrongly done. Additionally, hardware wallets seem to be less user-friendly, and the funds are more difficult to access than hot wallets.
A paper wallet is a piece of paper on which a crypto address and its private key are physically printed out in the form of QR codes. These codes are scanned to perform crypto transactions.
Due to the numerous shortcomings, the use of paper wallets is now deemed dangerous and should be discouraged. If you still want to use them, it is advisable to understand their risks. For instance, they are not suitable for sending funds partially, but the only total balance at once.
Cryptocurrency wallets are essential tools for using digital currencies. They form part of the primary infrastructure that facilitates sending and receiving digital assets through blockchain networks. Every wallet type has pros and cons, so it is essential to understand how they work before using them.
Are you in need of crypto wallets? Tokenizer is a blockchain investment platform and issuer of digital wallets. Contact us today for all your cryptocurrency wallet needs.