What are Crypto-wallets — Exploring Web3
Crypto wallet is a tool that can be used to interact with a blockchain network.
By the name crypto wallet, it may seem that it used to store cryptocurrencies, but that is not the case. Crypto wallets provide the tools needed to communicate with the blockchain network. These wallets generate all the information needed to use cryptocurrencies.
For example you want to receive a payment in cryptocurrency from your friend. The easiest way to do this is to use a crypto wallet application.
Note: Cryptocurrencies do not exist in a physical form and only exist in the form of transactions and digital records in a decentralised network like blockchain. Blockchains are a digital record of ledgers. To know more about blockchains and it’s functioning, here is the link to my article on blockchains:
So what exactly is a crypto-wallet ?
Crypto-wallet is an application that
stores our public and private key
monitors crypto balances
interacts with the block chain
provides ability to transfer and receive cryptocurrencies.
Private and Public Key in simple terms
Public Key — Public key or wallet address is the address you provide to other people to receive funds into your account.
Private Key — Private key is like a secret key which you need to access your crypto. As the name suggests, this needs to be kept confidential as anyone who gets access to a private key can access your crypto and obviously take away your cryptocurrency.
Public key is analogous to a bank account id which is shared with other people to receive funds, private key is analogous to the online banking password which provides access to the online account.
There’s a slight restriction while using public and private key — keys associated for a bitcoin blockchain can only be used to receive or send bitcoins. Now that’s a problem — you would need to remember the private key and the public key pair for each type of blockchain(one for bitcoin, one for ether etc.). To solve this problem, most of the modern day wallets make use of a seed phrase to generate multiple private and public keys. So instead of backing up all the private and public key pairs, the users only need to remember the seed phrase.
Types of Crypto Wallets
Different types of wallet can be divided into 2 main groups-
Hot wallets — Software Wallets
Cold wallets — Hardware Wallets, Paper Wallets
Hot wallets comprise of mainly the software applications which the users can use to exchange crypto currencies. In these wallets, the private key is generated on an application connected to the internet, so we call it hot wallet.
Hardware wallets — Hardware wallets are physical electronic wallets that make use of random number generators to generate the keys. These keys are stored on the device itself. Since it does not require internet connection to store and retrieve the keys, we classify it under cold wallets.
Note: Hardware wallets are more secure for long term investors as compared to the software wallets. Since the software wallets make use of internet, they are more prone to cyber attacks. However software wallets are more convenient to use for frequent traders.
Paper wallets — Paper wallet is a piece of paper on which a blockchain address and its private key is physically printed out(mostly in the form of QR codes). Use of paper wallet is highly discouraged because of its security risk and limitations in its usage. Frauds and scams were easier due to such limitations so they have kind of become obsolete.