In some ways cryptocurrency wallets are a bit of a misnomer. A wallet implies a place where money or assets are stored. But that’s not really the case with crypto. It’s not like a crypto wallet creates a folder or account and then all of your crypto is stored inside.
Instead, crypto assets remain on a blockchain or distributed ledger and are accessible via combo of public keys (which are used to both create a publicly shareable address) and a private key. And a wallet is just a tool to help connect the dots between the public and private keys and the on-chain assets.
Part of the appeal of a permissionless blockchain is that it is a transparent and publicly auditable way of handling financial transactions all while minimizing the need for trust. A blockchain is almost like a public escrow service.
A blockchain wallet system makes it possible to view someone else’s address and see what their assets look like and their transaction history prior to conducting a transaction without needing to know any identifying information about the person.
There are a few different kinds of cryptocurrency wallets and understanding the differences can have important security and overall usability implications. Here’s a quick rundown:
- Hardware wallet: Also known as cold storage, a hardware wallet is like a specialized microcomputer that generates a private key for accessing crypto. A hardware wallet is considered the most secure way to store crypto long term. Even if the physical device used to create the key is lost, you can recover the wallet by using a seed phrase, which is created when the wallet is first initialized.
- Software wallet: Also known as a hot wallet, a software wallet lives on either a desktop or a mobile device. A seed phrase is also issued by the wallet provider, like a hardware wallet, but software wallets are considered a little less secure because they can sometimes be compromised by things like planted malware or other kinds of attacks.
- Paper wallet: A paper wallet entails recording public and private keys on a piece of paper, which makes the keys more secure from some kind of computing attack, but also increases chances of other kinds of issues such as loss or theft.
A cryptocurrency wallet is a fundamental piece of crypto infrastructure that once set up and properly secured, lets users send, receive, and hold crypto assets.