Crypto wallets

4 min read – Jul 25, 2022

One Step Ahead - digital wallet header imageIt is time to clear up some confusions that spin around understanding crypto wallets. The wallets are one of the most, if not the most important, applications in the crypto puzzle. Without them, there is no Bitcoin, Ethereum, XRP, etc. Wallets are integral parts of the cryptocurrency ecosystem. They are the backbones of transactions between users and services.

If you claim to own cryptocurrencies and never set up a wallet, likely, you don’t control access to the assets, and transactions are processed on behalf of third-party services.
Because these wallets are in the custody of the third-party services, with whom you have an agreement, they are called custodial wallets. You have to be very careful where you put your assets. If anything happens to the services, you will likely pay a very high price.

 

So why is it not recommended to have assets in the wallets
managed by professional businesses?

Let’s start with explaining what really crypto wallet is and how it works. Wallet is a software that connects to a blockchain of a particular cryptocurrency. It has unique public address that works as its identity. This address is usually represented by alphanumeric string, and you provide it to other people or services to receive your cryptocurrency funds.

For the wallet to exist, it must have pair of private and public keys. The mentioned public address derives from the public key (note, wallet addresses and public keys are not the same). Even though the key is public, you are safer to keep it for yourself. Some wallets give you an option to create multiple addresses. They even encourage for better security, that each transaction should have new address created. Not all the wallets have this function.

Private keys, on the other hand, are for your personal use only and should not be shared. They have special place in the wallet — they allow to send the crypto funds. In the crypto world they also constitute the proof of the asset ownership. Thus you often hear the phrase Not your key, not your coin — that refers to owning private key. Losing the private key is equivalent to losing the assets. Having your bitcoin or other cryptocurrencies in the wallets where the private keys are out of your control is giving up the ownership.

In nutshell, the custodial wallets are the ones where private keys are out of your control. The non-custodial wallets provide you with private keys, you own them and you need to take care of them. Make a better choice.

Hot and Cold storage

You have learned so far the difference between custodial and non-custodial wallets.

But, it is even more interesting, that the non-custodial wallet can be a simple software that runs on your device (phone, laptop, desktop) connected to the network. Such wallets are called hot wallets. Because they are online, you can transact with your assets at any time. They are very comfortable, but they have one big security drawback — they are vulnerable to online attacks.

The opposite of it is a cold wallet. Usually, but not necessary in the form of USB devices. Cold storage is considered to be a safer option because no internet is needed to store crypto funds. You set them up once and keep them safe, away from the network. Stealing funds from cold storage is difficult because possession doesn’t give immediate access to its assets.

Cold wallets are not only USB devices, but any method that keeps your funds away from the network. They include paper wallets, physical bitcoin, or self-invented offline storage.

Online Security

Online security is a frequently debated, never-ending topic. And it is understandable. Access to the internet is very convenient but comes at a price of high vulnerability. Offline security, on the other hand, is rarely a topic (compared to online security), and it should concentrate more attention.

Paper wallets

The term derives from the legacy approach and is not referring exclusively to storing your keys on paper. In the early stage of Bitcoin, printing your private keys on one sheet of paper and keeping it in the sock drawer was the option for many. Due to the increase in the popularity of cryptocurrencies, this way is not recommended anymore.

The term paper wallet covers any approach of taking your private keys into your hands and storing them securely without digital assets represented directly in any wallet, let it be cold or hot, custodial or non-custodial. When required, your funds can be accessed using your recovery keys at any time with a wallet of your choice. By many, this is considered the safest approach.

A paper wallet can be your metal plate with engraved phrases, printouts, or even a self-invented secured storing method.

Follow us on Medium

Medium
Shopping Cart