If you understand cryptocurrencies you would understand the role of public address/keys and private keys. You would know that all the transaction are recorded in a ‘ledger’ called the Blockchain. Now, to authenticate any transaction/ transfer of cryptocurrencies we need an interface. Cryptocurrency Wallets provide such an interface. They also help you store your private keys securely.
What Are Cryptocurrency Wallets?
Digital cryptocurrency wallets are software programs that store private and public keys. They communicate with the blockchain network. Digital wallets show records of transactions related to the public addresses on the blockchain. They enable customers to make transactions and sign them with their private key.
The wallets also store the private key. Since the private key is a string of characters, it can be stored in any medium You can write it down on paper or store it on a USB stick.
How do Cryptocurrency Wallets work?
A large number of individuals utilize cryptocurrency wallets, yet there is extensive misjudging about how they function. Dissimilar to conventional ‘pocket’ wallets, computerized wallets don’t store cash. Truth be told, monetary forms don’t get put away in any single area or exist anyplace in any physical shape. All that exists are records of exchanges put away on the blockchain.
Cryptocurrency wallets are software programs that store your open and private keys and interface with different blockchain so clients can send and receive cash and monitor their balance.
When bitcoins or some other cryptocurrency is sent to you, they are basically closing down responsibility for coins to your wallet’s address. To have the capacity to spend those coins and open the assets, the private key put away in your wallet must match people to the public address the coins are appointed to. There is no real trade of real coins. The exchange is connoted just by an exchange of record on the blockchain and an adjustment of the balance in your cryptocurrency wallet.
Types of Cryptocurrency Wallets
Cryptocurrency wallets can be categorized into software wallets, hardware wallets, and paper wallets. Software wallets include desktop, online, and mobile wallets.
Cryptocurrency wallets can also be categorized into Hot and Cold wallets. Hot wallets are ones that are connected to the internet. Web wallets are good examples of Hot wallets as they are always connected to the internet. Cold Wallets are not connected to the internet. Hardware wallets and paper wallets are examples of cold wallets.
Multisignature (multisig) wallets make it possible for multiple users to sign (with their private key) for a transaction out of that wallet (public key address).
These kinds of wallets are downloaded and installed on a PC or portable PC. They are just open from the single PC in which they are downloaded to. The wallet stores the private keys encrypted. Desktop wallets offer good amounts of security. But if your PC is hacked or gets a malware there is the likelihood that you may lose every one of your assets.
Online or Web-wallets continue running on the cloud and are accessible from any enlisting device. Online wallets store your private keys on the web. Though they offer ease of use, they are very much prone to hacking.
These wallets keep running on an application on your mobile phone. The user interface offered by many mobile wallets is great. Also, they are valuable since they can be utilized at any place including retail locations. Mobile wallets are vulnerable to malware.
Hardware wallets vary from software wallets in that they store a client’s private keys on a hardware gadget like a USB. In spite of the fact that hardware wallets make exchanges on the web, they are put away disconnected which conveys expanded security. Hardware wallets can be perfect with a few web interfaces and can bolster diverse monetary forms; it just relies on which one you choose to utilize. In addition, making an exchange is simple. Clients basically connect their gadget to any web-empowered PC or gadget. Hardware wallets make it conceivable to effectively execute while likewise keeping your cash disconnected and far from a threat.
Paper wallets have your private keys printed on them. Either as an alphanumeric string or as a QR code. The public address is shown on your paper wallet and it can be used to receive funds. If you wish to spend money from your paper wallet you need a software wallet. Use the private key printed on your wallet to approve the transaction. Note that you should send the remaining balance of funds, if any, to another public address that belongs to you. This is known as change address.
With a watch-only wallet, someone can keep track of all transactions. Only the address (public key) is needed. Thus the private key can be kept safe in another location.
With a brain wallet, someone remembers the information to regenerate the private and public key pair(s), like a mnemonic sentence. This is often the seed key using which all the public addresses are generated. It also serves as the backup key. This is an example of a deterministic wallet.
Are Cryptocurrency Wallets Secure?
The security of Cwallets varies from wallet to wallet. Each kind of wallet has its pros and cons. Also, other factors like the development team behind the wallet play an important role.
Always take necessary diligent security precautions. Wallets provide back up seed key, keep it safe. Keep your wallet updated. Use encryption where ever possible. Enable 2-factor authentication for enhanced security. Use PIN and Passwords to add additional layers of security to your wallet. Always operate your software wallet from trusted devices. Ensure that they are malware free.
Cryptocurrency transactions cannot be reversed and take adequate care when making a transaction.
Essential features of a Good Wallet
Control over your private keys
Wallet needs to provide you full control over your private keys. That would prevent anyone from freezing your funds. It also protects you from unauthorized transactions. Wallets must not store the private key on their server. They must store them on your hardware protected with encryption. Ensure that your wallet is backed up.
Transactions are signed and broadcasted to the Blockchain network. When a wallet uses a full node for this purpose, it ensures the highest level of security. Otherwise, a third party trust is required. Full nodes offer the best level of protection but they are difficult to maintain as they use a lot of space and bandwidth.
An open-source wallet allows for anyone to check the code and scrutinize it. This makes sure that there is no secret code hiding in the software. A wallet also needs to be a deterministic wallet. A deterministic wallet derives its keys from a single starting point known as a seed. The seed allows for an easy backup/ restore of a wallet without needing any other information.
Full Control over fees
Wallets must not pre-decide the fees. They must offer flexibility and let you choose the fees. Wallets must also support RBF and CPFP. RBF (Replace-by-fee) allows the spender to increase fees. CPFP (Child Pays For Parent) allows the recipient to increase fees. Wallets must also suggest fees based on real time. This offers great flexibility to the users.
Wallets must prevent spying on your payments by rotating addresses. Ensure that you always use a new address whenever you are transacting. Wallets must allow you to use Tor so that your public address is not associated with your IP address.
Choosing the best wallet among the vast number of cryptocurrency wallets can be an involved task. But it is worth every bit. Once you have chosen a wallet, get it from the official site. Moreover, watch helpful video tutorials to get comfortable with the wallet. Also, practice making transactions with the wallet with small amounts of cryptocurrency. It is not at all recommended to store the bulk of your coins on any exchange or web-wallet.