The rise of blockchains and cryptocurrencies has fostered the development of dozens of new technologies, but few are more essential to everyday participants than the humble cryptocurrency wallet. Crypto wallets come in many different forms depending on a user’s desire for security, compatibility, or quick access, but all wallets share a few key components that make them work.
Wallet Keys: Public Keys vs Private Keys
Since the launch of Bitcoin, hundreds of blockchains have emerged to solve different problems or offer innovative new services. These protocols use a variety of cryptographic designs to ensure their chains can never be tampered with and can have different transaction speeds or capabilities. But just about every blockchain uses a pair of unique identifiers, known as keys, to send, receive, and control the tokens within each wallet.
A wallet’s public key is used as a ‘send to’ address and can be shared freely with anyone. Many wallets can produce any number of public keys as a way to organize incoming transactions from different sources, and public keys can be used to search for and examine the transaction history associated with that key on public blockchains.
Remember to be careful when entering public keys to send tokens, however—even one incorrect character in the address will send funds to the wrong account, with no way to call them back. If you have to use public keys in their natural string-of-characters format, it’s always best to copy and paste directly from wallet applications. If entered manually, double, triple, and quadruple check there are no errors before hitting send, or try a small test transaction first to confirm the address has been entered correctly.
The second key, the private key, holds control over any transaction sent from the associated wallet, and should never be shared with anyone. Private key addresses can look similar to public key addresses, but anyone who knows the private key to a wallet can drain all funds in moments, so it’s vital that your private keys stay strictly private. The only time you should ever enter a private key is for restoring access to a wallet using a well known wallet provider; even then, special care should be taken that the wallet application or website is genuine and not part of a phishing scheme.
Now that we’ve set the framework for the basic components of crypto wallets, let’s look at the different types of wallets available today. Most prominent blockchains have access to several of these wallet options, while for others, certain wallet types are still under development.
Hot Wallets
Hot wallets are active in the short term, used for everyday payments or trading and are usually accessible with little more than a user-set password. Mobile wallets are a popular option for many crypto participants, allowing ready access to sending and receiving tokens from anywhere with an internet connection. Many mobile wallets can also generate QR codes for public key addresses, offering a quick and easily scanned alternative to entering a long character string.
Desktop wallets are another common choice for cryptocurrency wallets. Desktop wallets (also compatible with laptops) are typically feature-rich and make it easy to copy or send correct wallet addresses via email or other communication services. Desktop wallets are one of the best ways to organize different sources of funds by easily generating and managing multiple public keys, and are also often closely integrated with blockchain explorers, which index the historical transactions on public blockchains. For power users, desktop wallets are a good choice.
Web wallets can be accessed from any web browser like Chrome or Firefox, but require the user to know and enter their private key to access funds. Web wallets are useful in a pinch if your private key is readily available, but can also pose a security risk. Phishing attacks and copycat websites can jeopardize your private key, potentially delivering it to bad actors. If possible, it’s best to find an alternative to web wallets because of their inherent security risks.
Cold Wallets
If security is your priority, cold wallets offer lower risks to your crypto holdings, but come with their own limitations. Hardware wallets are like a highly secure USB drive for your crypto, ensuring your holdings are only accessible when the wallet is physically plugged into another computer. Some hardware wallets even offer biometric security like fingerprint readers for maximum security. These hardware wallets can be stored in a secure location to ensure no one can access your cryptocurrency, while still offering a straightforward means of accessing it yourself when the time is right.
By far the most simple type of wallet, and arguably one of the most secure, is the humble paper wallet. This is little more than your private key written down on a piece of paper and locked up in a secure location. Paper wallets are great for a simple and highly secure means of storing cryptocurrencies, but take more work to access when moving tokens out of cold storage.
Access to funds in a paper wallet can be achieved by restoring the wallet using the private key to a mobile or desktop wallet, or a web wallet as a last resort. Paper wallets help ensure your personal details are never connected to the wallet keys, but they can be lost or damaged and thus are best used for long-term cold storage.
Custody Wallets
One other type of wallet exists that might be suitable for the right crypto user. Custody or custodial wallets are managed by third-party institutions, not unlike a stock broker. Some custody providers give customers access to their private keys, but some popular services where users can easily buy or sell cryptocurrencies online don’t give access to private keys.
In theory these services could run off with your crypto, but in practice these large, well-regulated businesses are much more interested in protecting your funds. Some custody providers even offer insurance against hacks or technical failures that could put their clients funds at risk.
Custody wallets can also guard against sending funds to an incorrect address and can help with more complex crypto activities like staking tokens. Overall, though, most custodial services are geared towards serving high net-worth individuals or financial institutions.
Whichever wallet you choose, it’s an exciting entry into the world of blockchains and cryptocurrencies. Just remember to never give out your private key, and always double check the receiving address when sending funds. Unlike institutions like banks, who might be able to help you recover from a hack or mistake, cryptocurrency wallets put you in full control of your financial wellbeing. With great power comes great responsibility, and a path to the new world of the ethical economy.
ANATHA
Human Needs First
