If you are just hearing about cryptocurrency or still don’t have a basic understanding of what it’s all about, we suggest you read our cryptocurrency introductory guide before you proceed with this article.
- Suggested Read: What is cryptocurrency and why is it important?
There are no doubt digital wallets forms a key component of the cryptocurrency market. To store money (physical cash), you need a bank. Likewise, in the crypto world, to store cryptocurrency, you need a digital or crypto wallet.
A cryptocurrency wallet provides users with a platform where they can send, receive and as well keep track of cryptocurrency balance.
But unlike banks with a vault, a cryptocurrency wallet does not store crypto, instead, it stores the private and public keys and allows users to interact with the different blockchain supported by the wallet.
Cryptocurrency wallet, private and public key pair
While there are different wallets, the one thing common in every cryptocurrency wallet is a pair of keys. They are the public and private keys. These cryptographic keys ensure encryption and decryption of transaction, while a user sends and receive cryptocurrency.
The private key comes in different forms, for some wallet, the private key is a string of codes, for others, it’s a list of backup phrases. The private key is used to prove ownership and gives a user full control over a wallet. It’s very important to back up these keys because it’s irrecoverable. Once it is lost, there’s no other way to gain access to the coins stored. The coins will remain stuck in there forever.
While the public key serves as the address of the wallet. It comes in the form of alphanumeric codes. The key serves as the address you are to give out anytime you want to receive coins into the wallet. Let’s look at
How does cryptocurrency wallet work?
Consider two friends, Bob and Sam.
Bob, the crypto guy, had introduced Sam to bitcoin for the first time. For a start, let’s assume Bob decides to send Sam some bitcoins.
Before sending, Sam will need to create a crypto wallet. By creating the wallet, it will generate a public and private pair.
For Sam to receive those coins, he needs to send his public key (address) to Bob.
Bob will then use Sam’s public key to send the coins
For Sam to access the coins sent by Bob, he will use his private keys to decrypt the wallet.
Depending on your preference, there are two main storage options for cryptocurrency wallets. They are hot and cold wallets and come in different forms. There’s a mobile wallet, a desktop wallet, a hardware wallet, a web-based wallet, and a paper wallet. They all vary in their security.
What is a cold wallet
A cold wallet provides offline storage. Wallets that are cold storage increases the safety of the coins and eliminate the risk of theft and hack. While mobile, and web-based wallets, are easy to use, they are vulnerable to hack as they more online.
What is a hot wallet
A hot wallet provides online storage options and allows users to access and track their crypto on the internet. They are simple to use but need an extra layer of protection.
Types of cryptocurrency wallets
The paper and hardware are cold wallets.
Paper wallets provide the highest level of security. The printed paper contains both the public and private key pairs. Paper wallets are not electronic, therefore, they can hardly get damaged
Web-based, desktop, and mobile wallets are hot wallets, but their security features vary from each other.
Web-based cryptocurrency wallets are hybrid wallets. Hosted and operated on a central server where they store the private and public keys. Users operating this wallet can be vulnerable to hacks, which can lead to losing access to their crypto. However, adding an extra layer of security can enhance safety. Examples include Blockchain wallet.
The desktop wallet is a software program installed on a computer or laptop. Their compatibility depends on the operating system they support. Unlike web-based and mobile wallets, some desktop crypto wallets have no hosted server. That said, a desktop wallet security depends on the computer where it’s installed. If a virus attacks the computer, one might lose the wallet. Examples include; Exodus, Copay, etc.
Finally, It’s important to mention, in the crypto world, YOU ARE YOUR OWN BANK – meaning you are responsible for your coins. Therefore, before deciding which wallet to use, it’s important you conduct due diligence.
Disclaimer: This guide is purely educational. We advise users to do their own research before taking any decision. Decentralize.Africa is not responsible for any damage caused by the products mentioned in this article.