Prior to investing or trading in cryptocurrencies, one of the most fundamental steps is to figure out a secure place to store crypto-funds. Numerous crypto wallets exist to serve this purpose and manage crypto fund exchanges. In order to be able to choose the right wallet for our requirements, we should become familiar with all types of crypto wallets. Let’s dive in!
What is a Crypto Wallet?
A Crypto Wallet is the digital space which allows us to interact with blockchain networks and manage blockchain-based funds (i.e., cryptocurrencies like bitcoin or Ethereum etc.). It enables the easy exchange of blockchain-based funds while maintaining user’s privacy and identity as well as the security of transactions are secure.
Whenever a crypto wallet is created, there is a pair keys - private key and public - linked to the wallet.
A public key (i.e., alphanumeric identifier) is generated along with the wallet, and the user can share it with others to receive crypto funds. The private key acts as a password and should not be disclosed to others. We use the private key to make transactions and exchange crypto funds.
Crypto Wallet Types
Crypto Wallets are categorized into two main types:
Hot Wallets – Works if internet connection is accessible.
Cold Wallets – Works if internet connection is inaccessible.
Classification of Crypto Wallets
Based on the approach used and storage location, crypto wallets are further classified into the following categories.
Software Wallets
Software wallets are divided into various subtypes, each possessing distinct characteristics.
Desktop Wallet (Cold Wallet)
Desktop wallet is actually a software that is downloaded and executed on a personal computer (i.e., desktop system). After installation, desktop wallet provides a full control to user over keys and funds. It does not involve any third party, thus ensures privacy and anonymity. Some basic security measures are required to take into consideration like activating an antivirus. This type of wallet serves best if the main server fails to respond and, in this case, it acts as backup server.
Strengths
Provides an ease of use
Private keys are not stored on a third-party system
Weaknesses
There are security threats if connected to internet
Computer backup is of significant otherwise it can lead to a great loss
Antivirus should be activated to combat harmful virus or malwares
Examples
Some well-known desktop wallets:
Exodus
Bitcoin core
Electrum, etc.
Web/Online Wallet (Hot Wallet)
An online wallet is accessed by browsers such as such as Google Chrome, Firefox and Safari. Private keys are stored online and hence are susceptible to DDOS attacks. Online wallets can be hosted or non-hosted depending upon the type of wallet. Non-hosted wallet is generally recommended because a user can always control his/her funds in this case.
Strengths
Easily accessible everywhere, complete transactions quickly
Good for holding small amounts of cryptocurrency
Ability to manage and deal with multiple cryptocurrencies
Weaknesses
Users are vulnerable to out-of-date security measures, DDOS attacks and phishing scams.
Third party is involved to store information
Virus’ can attack through external online sources
Examples
Some well-known online wallets:
Metamask (Non-hosted)
MyEtherWallet (Non-hosted)
Cex.io (Hosted)
Coinbase (Hosted)
Mobile Wallet (Hot Wallet)
A mobile wallet is similar to an online wallet but is accessible through smartphones. It is easy to use as it possesses the capability of QR codes for carrying out transactions. Mobile wallets are convenient for daily operations but are susceptible to malware attacks. Encryption of such type of wallets is required.
Strengths
Ubiquitous and easy to handle
Possess additional features such as QR code scanning
Weaknesses
As mobile devices are most insecure there is a risk associated with cryptocurrency
Encryption is a security measure for safe transactions
Examples
Some well-known mobile wallets:
Mycelium
Coinomi etc.
Hardware Wallets (Cold Wallet)
Hardware wallets are physical devices that manage public addresses as well as private keys. It looks like a portable device (i.e. a USB) having OLED display screen along with side buttons. It can be connected to your desktop and accessed by native applications. These wallets do not require batteries to function and are available in various forms offering adequate degree of control.
Strengths
The most secure method to store cryptocurrency for the long-term
Security measures are well maintained against online attacks compared to other wallets
Weaknesses
Lack of accessibility compared to hot wallets
Difficult for new users to understand processes and use immediately
Examples
Some well-known hardware wallets:
LedgerNano S
TREZOR
KeepKey etc.
Paper Wallets (Cold Wallet)
Paper wallets are physical wallets which include a QR coded printed form. Some wallets permit the generation of new address offline after downloading the code. Paper wallets are not vulnerable to hacks and online attacks. One major pitfall is that these types of wallets are unable to send incomplete transactions (i.e., partial funds) and are restricted to making only full amount transactions at any time.
Strengths
Hacker-proof crypto wallet
Not stored on a digital device
No third-party server is involved to store private keys
Weaknesses
Overhead costs to manage and exchange cryptocurrencies
Technical knowledge required to understand workflows and transactional processes
Example
A well-known paper wallet:
Bitcoin Paper Wallet
Closing thoughts
Crypto wallets are a significant component of cryptocurrencies such as Bitcoin and Ethereum. Transactional exchanges are only possible utilizing the infrastructure of crypto wallets as they enable users to send and receive amount of funds via blockchain networks. Each wallet type has distinct benefits and drawbacks, so it is pivotal to get to know about their working processes and have clear understanding before playing with cryptocurrency and making transactions.
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