All you need to know about Crypto Wallets

Traditional banking systems create a slew of complications when it comes to conducting transactions. To begin, transactions are frequently inefficient. Additionally, any transaction must pass through an intermediary, such as a bank, implying a single point of failure. Additionally, there are issues with maintaining track of all accounts and balances; data can be compromised, manipulated, or even corrupted across multiple accounts and balances systems. These issues are mitigated or resolved by crypto wallets. 

A blockchain wallet is a type of cryptocurrency wallet that enables users to store and manage multiple cryptocurrencies, such as Bitcoin or Ethereum. A blockchain wallet allows easy financial transactions. Cryptographically signed transactions ensure transaction security. The wallet is accessible via web browsers, including mobile browsers, while maintaining the user’s privacy and identity. Thus, a blockchain wallet includes all necessary features for safe and secure fund transfers and exchanges between parties. 

Are you in need of a wallet to hold your recently obtained cryptocurrency? This article will discuss the many kinds of cryptocurrency wallets currently available on the market.

Custodial Wallet

As the name implies, a custodial cryptocurrency wallet holds your assets safely for you. This implies that your private keys will be held and managed by a third party on your behalf. In other words, you will not have total control over your cash – nor will you be able to sign transactions. However, employing a custodial cryptocurrency wallet service is not always negative. 

During Bitcoin’s early years, all users were required to build and maintain their own wallets and private keys. While “being your own bank” has several advantages, it may be cumbersome and even dangerous for less experienced users. If your private keys are stolen or compromised, you will permanently lose access to your crypto assets. According to blockchain analysis findings, over 3 million BTC may have been permanently destroyed

Even if you forget your cryptocurrency exchange password, you should be able to recover access to your account and funds by contacting customer service. However, if you use a non-custodial wallet, you are ultimately responsible for the security of your crypto. 

Therefore, using a custodial wallet service makes sense in many circumstances. However, this also implies that you are entrusting a third party with your private keys. It is important to choose a trustworthy exchange or service provider. It is important to consider whether they are regulated, what services they provide, how your private keys are handled, and whether they offer insurance coverage when evaluating custody service providers. 

Non-custodial Wallet

A non-custodial crypto wallet is one in which the private keys are held and controlled only by the bearer. Non-custodial wallets are the ideal alternative for individuals who desire complete management over their cash. Because no middlemen are involved, you may trade cryptocurrency straight from your wallets. It is an excellent solution for seasoned traders and investors who understand the importance of managing and protecting their private keys and seed phrases. 

When communicating with a decentralized exchange (DEX) or a decentralized application, you will require a non-custodial wallet. Uniswap, SushiSwap, Curve Finance, and Trader Joe are all prominent decentralized exchanges requiring a non-custodial wallet. Trust Wallet and MetaMask are excellent examples of suppliers of non-custodial wallet services. However, remember that you are solely responsible for securing your seed phrase and private keys while using these wallets.

Software Wallets

A software wallet is a program that is downloaded onto a device; this device could be a desktop or a mobile device or a web-based wallet accessed online. The popular software wallets include Breadwallet, Jaxx, and Copay. Additionally, software wallets can be classified as desktop wallets, online wallets (web wallets), or mobile wallets. 

The following sections discuss the most prevalent and significant types: online, desktop, and mobile wallets. 

Web Wallets

Without downloading or installing anything, you may use web wallets to access blockchains through a browser interface. This covers both exchange wallets and other wallet providers accessible through a web browser. Generally, you may establish a new wallet and provide it with a unique password. On the other hand, certain service providers store and handle your private keys. While this is more convenient for novice users, it is a risky practice. 

Another type of Web Wallet is the browser extension wallet. This is the most popular type of crypto wallet since the majority of them are non-custodial which allows anyone to interact with decentralized applications. Depending on which blockchain you are willing to use, there are many options available, with the most common wallet being Metamask. Non-custodial web extension wallets are the most used wallets used for DeFi applications.

Desktop Wallets

A desktop wallet, as the name indicates, is software that you download and install on your computer. Unlike other web-based wallets, desktop wallets provide you with total control over your keys and money. When you create a novel desktop wallet, you generate and save a file called “wallet.dat” on your computer. Since this file contains the private key information required to access your crypto addresses, it should be encrypted with a unique password.

Mobile Wallets

Mobile wallets operate similarly to desktop wallets, but are optimized for use on smartphones. These are quite useful since they enable the sending and receiving of cryptocurrency using QR codes. Hence, mobile wallets are well-suited for everyday transactions and payments, making them an attractive alternative for spending Bitcoin, ETH, BNB, and other cryptocurrencies in the real world. Trust Wallet is a well-known mobile cryptocurrency wallet application. 

Nevertheless, mobile devices may be infected with dangerous software and viruses much like computers. As a result, it is suggested that you password-protect your mobile wallet and back up your private keys (or seed phrase) if your smartphone becomes stolen or damaged.

Hardware Wallets

A hardware wallet is a cold storage device, similar to a USB flash drive, that securely stores the user’s private key. These wallets resemble portable electronic devices that can be connected to a computer. As previously stated, they are more resistant to malicious attacks and hacking. The leading hardware wallet manufacturers are Ledger, Trezor, and KeepKey. 

Since it is not linked to the internet, it eliminates a significant security risk. With a hardware wallet, you establish a seed phrase that will assist you in regaining access to your cryptocurrency if your device is lost or stolen. Your private key will never leave your device while doing transactions. The gadget seeks information about the transaction and then verifies the data. This prevents the device’s private key from escaping. 

Multiple apps and blockchains are supported via the ledger hardware wallet devices. In this manner, you may work with various cryptographic kinds on a single device. 

While hardware wallets might be more expensive than software wallets, they provide more security. They are particularly advised for people with a substantial amount of cryptocurrency or who want to store it for an extended period.

Hot versus Cold Wallets

Internet connectivity establishes the hot/cold status of a wallet. Since hot wallets are connected to the Internet, they have a lower degree of security and expose users to additional risks, but they are more user-friendly. A hot wallet is another term for a software wallet. It is a kind of online storage that you may access through your computer or phone. Due to the internet connection, hot wallets are not as safe as their cold wallet equivalents. Besides allowing you to retain your crypto on the exchange, some exchanges will provide a separate hot wallet. 

Conversely, cold wallets are stored offline and do not require internet access. A cold wallet, known also as a hardware wallet or cold storage, is a physical device that totally isolates your crypto. As a result, security is increased, and risk is minimized. Compared to a safe or a vault, a carry-around wallet can store significantly more money. Numerous hardware wallets resemble USB flash disks.

Hot wallets are more frequently used for daily transactions, whereas cold wallets are more frequently used for longer-term holdings. Hot wallets are simple to use and provide instant access to funds. Traders utilize them for convenience. Since cold wallets are impenetrable to hackers, they are ideal for HODLers. As a safeguard, only a small percentage of the cryptocurrency is stored in hot wallets, with the remainder trading directly from their cold storage devices. 

Hot wallets are online wallets that enable the immediate transfer of cryptocurrencies. They are accessible through the Internet. Coinbase and Crypto.com are two of the more well-known examples. Cold wallets are digital offline wallets in which transactions are signed and then disclosed online. They are not stored in the online medium of the cloud or on the internet; instead, they are stored locally for maximum security. Trezor and Ledger are some examples of cold wallets. 

Private keys are stored in the cloud with hot wallets to facilitate transaction speeds. Private keys are stored in cold wallets on dedicated hardware that is not connected to the internet or the cloud, or on a paper document. While hot wallets are convenient to access online 24 hours a day and can be accessed via desktop or mobile device, there is a risk of unrecoverable theft if they are hacked. The transaction method used by cold wallets contributes to the wallet us protection against unauthorized access. 

Multi-Signature Wallets

Multisig is an acronym for multi-signature, a kind of digital signature that permits documents to be signed collaboratively by two or more persons. As a consequence of integrating several different signatures, a multi-signature is generated. Whereas multisignature technology has been in the domain of cryptocurrencies since the inception of Bitcoin, the notion predates the creation of the cryptocurrency.

Typically, cryptocurrencies are held in a single-key address, making them accessible to anybody who has the accompanying private key. This implies that only one key is required to sign transactions, and anybody who has the private key can move money at a whim, without obtaining prior consent from others.

While keeping a single-key address is quicker and simpler than managing a multisig address, it introduces several complications, most notably in terms of security. Because a single key safeguards the assets, they are vulnerable to a single point of failure, which is why fraudsters are always creating new phishing schemes to attempt to steal cryptocurrency users’ cash. 

Furthermore, single-key addresses are not the ideal solution for businesses that conduct massive crypto transactions. Consider that the cash of a huge corporation is housed in a standard address with a single corresponding private key. This would essentially imply that the private key would be distributed to a single individual or a group of individuals simultaneously – hardly the safest course of action.

Multisignature wallets may provide a solution to both of these issues. Unlike with a single-key address, cash saved on a multisig address can only be transferred with multiple signatures (which are generated through the use of different private keys). 

Depending on how a multisig address is constructed, a different combination of keys may be required: The most popular is 2-of-3, in which just two signatures are required to access the money of a three-signature address. There are, however, several different versions, such as 2-of-2, 3-of-3, and 3-of-4.

Final Words

Ultimately, working knowledge of the various types of cryptocurrency wallets is critical for prudent cryptocurrency investment. Volatility is one of the most frightening characteristics that has become abundantly clear in the domain of cryptocurrency in recent times. Simultaneously, security is becoming an increasingly important concern concerning cryptocurrency investments, and the different types of wallets will help you understand the optimal choice for you.

Aris Ioannou
Aris Ioannouhttps://coinavalon.io
Aris created Coinavalon with the purpose of helping the average person navigate the decentralized web. Aris has been passively in the space since 2017 and full time since late 2020. Before Coinavalon, Aris worked as a Business & IT Architect in the financial services sector. Aris holds an MSc in Advanced Computing from Imperial College London, a BSc in Computer Engineering from University of Cyprus and currently pursuing an MBA degree from CIIM.

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