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As user demands progress ahead with the coming of unique ways to spend, swap, and store their cryptocurrencies, there has been an upsurge of exchanges and wallet providers for users. With the entry of exchanges and wallet providers in the crypto market, a bevy of options has opened for users to manage their assets.
It also becomes challenging for the users to pick one from a vast plethora of crypto wallets. Users often get perplexed when deciding what attributes make sense for them, depending on their usage style.
If you’re in the same shoe, we have you covered. In this blog, we will further break down the broad topic of crypto wallets and provide a detailed discussion of what they are, how they work, and the types of crypto wallets. This will help you make informed decisions. ImmuneBytes is a one-stop destination for you where we won’t ever turn a blind eye to your queries and try to answer them quickly!
So, let us begin.
What Is A Crypto Wallet?
If you want to interact with the blockchain, a crypto wallet will help you do that. With the help of a software or a specialized hardware device, crypto wallets make transactions easy and smooth for users. They serve as an intermediary between the users and their “live” assets on any particular blockchain.
There is a wide array of forms in which these wallets exist. Users can decide which they want to choose, depending on their usage. It becomes a near cakewalk for users to keep a check and manage their cryptos, simultaneously initiating and executing the transactions.
How Do Crypto Wallets Work?
There is one thing that is common in all types of crypto wallets, and that is the keys. You will require a key to access the users’ crypto assets in all these wallets. A pair of keys is also generated when a wallet is generated. One of them is public, and the other is private. However, although these alphanumeric sequences might look to be similar, their functions are completely different.
Just like you can share your bank account number with everyone who wishes to send you money, a public is similar. You can share it with everyone who wishes to send you cryptocurrency. On the other hand, you will keep your bank account’s PIN code private from others. A private key is similar. You must always safeguard it and never share it with anyone. Otherwise, anyone who gets your private key can access all your crypto holdings and empty them as they wish.
When a user wishes to send bitcoin, whether to pay for an upcoming vacation or to purchase a new watch, they enter the destination wallet’s public key and the amount of cryptocurrency they desire to send. When a user seeks to receive cryptocurrency, the procedure is reversed. The transaction must be “signed” with the private key when bitcoin leaves a wallet. How that critical step takes place is determined by the sort of wallet you use.
Types of Crypto Wallets: Cold Wallets V/S Hot Wallets
Before delving deeper into the types of crypto wallets, you need to know that two distinct types of wallets are used to store cryptocurrencies. These are “Hot” and “Cold” wallets.
The wallets that are connected to the internet. These are known as hot wallets. Users find it easier to use these wallets, which is why most wallets today are hot. On the flip side, hot wallets are easy and more prone to hacking.
Since they are connected to the internet, they become vulnerable and an easy target for the prying eyes of malicious actors. For the same reason, users are always recommended to store only a small amount of their crypto holdings.
Naturally, cold wallets are the ones that are offline and aren’t connected to the internet. Since they are offline, hackers find it impervious to hack them. So, they are more secure as compared to hot wallets. Also, they are more technical to use. That’s why cold wallets are better suited for experienced users who know how to use them and have many assets to store in the wallets.
Let us now understand each of these wallets in detail.
Types of cold wallets
Users who want to take charge of the security of their accounts on their own go for a cold wallet. The two most commonly used cold wallets are hardware and paper wallets. These wallets fall on the opposite end of the spectrum of technology.
What’s more interesting is that both these wallets have a different architecture; In contrast, paper wallets offer users a low-tech solution, while hardware wallets use a complicated web of high-tech components. However, these wallets are a good option to secure your cryptos.
It is an offline solution where users can write or print private keys and store them securely, as shown in the image below.
While some users stick to the traditional pen and paper approach, creating your own wallet that you can print is recommended. There are numerous websites where you can get them generated.
There are both pros and cons to using a paper wallet.
Now let us see how hardware wallets are different from paper wallets.
These wallets are perfect for those users who wish to use a more high-tech solution for storing their assets. A hardware wallet provides safe, private key storage in various configurations. They are physical devices that look similar to a USB thumb drive. They remain offline unless they are plugged into a mobile or a computer device. If you wish to know how to use a hardware wallet like a whale, then we can help you understand that.
You can choose from a wide variety of hardware wallets like Ledger Nano S, Ledger Nano X, Trezor Model One, etc., to store your crypto holdings.
These are some of the advantages and disadvantages of using a hardware wallet.
Let us now proceed with understanding more about hot wallets and their types.
Types Of Hot Wallets
Hot wallets are the go-to choice for those users who wish to have their cryptos by their side so that they can spend them whenever they want. There are so many varieties of hot wallets, with advantages and disadvantages of their own. Depending on your needs, you can select the most suitable one for you.
These types of hot wallets use the method of encryption to keep the users’ private keys secure on the computer’s hard drive. These are some of the pros and cons of using a desktop wallet.
You can choose from a wide range of desktop wallets like Electrum, BitPay, Exodus, and more.
Web wallets are the ones that a third party provides the users with. In most cases, it is the crypto exchanges that do this. With the help of a web browser, the exchanges offer seamless access to the holdings of the user.
If you wish to use a web wallet, then you must know the pros and cons of using one. These are:
When choosing a web wallet to store your cryptocurrencies, you can go for Coinbase, Guarda, Metamask, etc.
As the name suggests, anyone with a smartphone and an internet connection can use a mobile wallet. They allow instant crypto transactions for users. A mobile wallet has the following benefits and disadvantages.
Custodial V/S Non-Custodial Wallets
The fundamental distinction between these choices is one of security vs. convenience, as well as who is responsible for safeguarding a wallet’s private keys.
A custodial wallet is where a third party, such as a cryptocurrency exchange, keeps a user’s private keys and uses them to “sign” initiated transactions on the owner’s behalf. Custodial wallets are ideal for users who don’t want to hassle too much with security and aren’t concerned about entrusting their private keys to a third party. Large quantities of bitcoin should not be kept in a custodial wallet due to dangers like hacking or an exchange going bankrupt (which has occurred previously).
Non-custodial wallets are frequently favored by more skilled crypto users or those who desire total control over their private keys. The possessor of a non-custodial wallet is solely responsible for keeping their private key secure.
Non-custodial wallets do not need a user’s faith in a third party for account security, but they do necessitate a significant level of self-trust. Remember that if a private key is lost or compromised, a user’s money may be drained or rendered inaccessible.
Before you decide which crypto wallet to use, jot down your priorities, brainstorm, and ask yourself what actually matters to you. Whether it is the ease of use or security, you’re more concerned about it.
Consider how quickly accessible you want your cryptocurrency to be and how much security you’re ready to give up for that ease. These are some of the considerations you need to consider before deciding which wallet you will use.
If you’re still perplexed with anything related to crypto wallets, then we will be more than happy to assist you. ImmuneBytes is a true paradise for people looking for smart contract auditing services. Bring your queries, and we will solve them all.