Crypto wallets are at the core of how users interact with Web3 brands and dApps.
If you want to buy crypto, NFTs, or simply have an identity that will allow you to sign up to on-chain services, you need a crypto wallet.
The wallet stores your private keys – the passwords that give you access to your cryptocurrencies – in a secure and accessible way.
If you lose your wallet but know your keys, you can recover the contents.
If you lose your keys, anyone can get access to your wallet.
Crypto wallets come in many forms, from hardware wallets like Ledger (which looks like a USB stick) to mobile apps like Coinbase Wallet, which makes using crypto as easy as shopping with a credit card online (we'll cover these in more detail later).
Crypto wallets are essential for anyone looking to use or invest in cryptocurrencies, NFTs, or use dApps.
With the increasing popularity of cryptocurrencies, crypto wallets have become an integral part of the cryptocurrency ecosystem. Let's quickly look at their security.
In short, it's your passport to using Web3 services and digital assets.
You can engage with Web3 without a wallet and use things like wallets built into crypto exchanges, but it's not recommended.
Remember, not your keys, not your crypto.
By having your own wallet you control access to your assets and your information. This way, you can retain ownership of your private keys and have full control over your own finances. You're basically not taking unnecessary risks by letting an exchange control access to your assets.
Unlike traditional wallets which hold physical currency, cryptocurrency wallets do not actually store coins or tokens.
Instead, they store the cryptographic keys that are needed to access the funds stored on the blockchain network.
Think of them more as an access point. Your assets are stored on chain and your wallet simply helps locate and give access to them.
They're more like a key to a vault than a physical wallet.
When you set up a new wallet you'll be given an address. Usually, these are a long string of letters and numbers. See the below example from Etherscan to see what a wallet address looks like.
You'll get an address like those above.
And your assets will be assigned to your wallet address.
If you want to receive assets from someone else, you give them your wallet address.
If you want to send assets to someone else, you'll need their wallet address.
Wallets usually work with one specific blockchain. the examples above are all on Ethereum. If you want to send assets to someone else you'll need to make sure you're both on the same blockahin or else the transaction could be lost.
The security of a cryptocurrency wallet is determined by its type. Hot wallets are connected to the internet and offer quick access to funds but may be more vulnerable to hacking than cold wallets which are not connected to the internet and provide an extra layer of security. Additionally, some wallets offer additional features such as multi-signature authentication which requires multiple users to sign off on a transaction before it can be completed. This feature adds an extra layer of security for users who want to protect their funds from unauthorized access.
Crypto wallets are designed to be secure, but there are still risks associated with them.
It is important to understand the security features of your wallet and take steps to protect it from malicious actors.
We'll explain the types of wallets in the next chapter of this guide.
Hot wallets (or software wallets) are connected to the internet and offer quick access to funds but may be more vulnerable to hacking than cold wallets which are not connected to the internet and provide an extra layer of security.
Additionally, some wallets offer additional features such as multi-signature authentication which requires multiple users to sign off on a transaction before it can be completed.
This feature adds an extra layer of security for users who want to protect their funds from unauthorized access.
You'll want tn look through our list of the best crypto wallets here to make a better decision.
There's a large variety in the way wallets work.
Some crypto wallets are simple-to-use apps, others are more complex security solutions. The main types of wallets you can choose from include paper wallets and hardware wallets.
Generally speaking there's a set order of using a wallet.
There are some extra steps if you're using a hardware wallet as they often require you to put a code in each and every time you make a transaction.
However, we'll cover that in more detail in a short while.
Cryptocurrency wallets come in two main types: custodial and noncustodial.
Custodial wallets are hosted by a third party that stores your keys for you, such as a company that provides enterprise-level data security systems businesses use to preserve and secure data.
Some cryptocurrency exchanges offer custodial wallets for their customers, so they can store their coins on the exchange itself. For example, Binance has the Binance wallet which is tied directly into their service and which they control.
Noncustodial wallets, on the other hand, are wallets in which you take responsibility for securing your keys.
This is the type of wallet most cryptocurrency users have on their devices.
With this type of wallet, it’s important to remember to back up your private key and keep it safe from hackers or malicious actors who may try to steal your funds.
Non-custodial wallets also come in two forms.
Soft wallets are often software based (MetaMask chrome extension is a good example).
Hard wallets are often a physical device like a USB that's needed to authorise transactions.
Soft wallets are less secure, but more convenient than hard wallets.
The choice between custodial and noncustodial wallets depends largely on how much control you want over your funds.
If you’re comfortable with trusting a third party with your keys, then a custodial wallet may be right for you.
However, if you prefer more control over your funds and don’t mind taking extra steps to secure them yourself, then a noncustodial wallet may be the better option. Whichever type of wallet you choose.
In the next chapter of this guide we'll look specifically at the differences between hard and soft wallets.
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