Cryptocurrencies and blockchain are already a well-known topic for many. The whole world watched the incredible growth and subsequent fall of Bitcoin, the emergence of new cryptocurrencies and the disappearance of many of them. However, there were topics that still raise questions. These include a cryptocurrency wallet.
We all know that a regular wallet is needed in order to store money and bank cards. At the same time, everyone knows the principle of operation of cryptocurrencies and the blockchain: transaction data is written to the blockchain, everything is open and accessible. Then the question arises: why do we need a crypto wallet if it does not store anything? You will get the answer to this question by reading this article.
Cryptocurrency Wallet: The Basics
Imagine you want to start investing in cryptocurrencies or just get income in crypto. To do this, you need to know how and where to store this asset.
If we take the general concept of a cryptocurrency wallet, then it acts like a well-known wallet for storing money. That is, it provides you with assets in the event of the purchase or exchange of your funds. At the same time, there are important differences between this type of wallet.
Does Not Store Cryptocurrency
Although a wallet gives you the ability to manage your funds, in fact, it does not store cryptocurrency. Crypto wallet is a graphical shell for interacting with the blockchain, in which your transactions are directly recorded. Imagine a web browser. It is necessary for the convenience of working with the Internet, and a wallet is needed to work with the blockchain. Thus, the wallet can generate the necessary information to receive and send money on the blockchain (for example, a private or public key).
Cryptocurrency address
The crypto wallet has its own address, recorded as an alphanumeric identifier in the blockchain. This address is generated from private and public cryptographic keys. An address can be used to send and receive money.
- The public key can be called the wallet address, which is necessary in case of transfer of cryptocurrency from another owner.
- Private key gives access to wallet assets. That is, if someone will send you funds, he needs to know the public key, and only you should know the private key.
The Basis of Cryptocurrency Operations
If you can get paper money at an ATM, put it in a bank account or keep it at home, in the case of cryptocurrencies, they do not exist physically, but only as an entry on the blockchain. To transfer, receive or exchange money, you will need a crypto wallet. Thus, it is necessary to choose a reliable wallet, since it is he who is an important component of cryptocurrency transactions.
Types of Cryptocurrency Wallets
There are a large number of cryptocurrency wallets. However, it is worth noting the most important. Let's start by classifying wallets by level of confidentiality and control. There are two main types - centralized and decentralized.
- A centralized wallet is a program that is owned and managed by a centralized third party. She has exclusive access and control over funds. To make it easier to understand, let's look at an example. Take a regular bank. While the money is in the bank, he can dispose of it. Imagine that he went bankrupt, you will lose your contributions.Also, the bank may limit access to your own funds. In addition, you have to pay a service fee to the bank. Those who use a centralized wallet generally do not have access to private keys. This type of wallet is to some extent contrary to the principle of blockchain. Moreover, this type of crypto-wallet management poses a great risk to asset owners in the event of dishonest third-party management.
- Decentralized wallet - this type of wallet implies that all operations with funds are carried out by a person who owns a private key. Although this type does not guarantee complete anonymity, it gives the right to dispose of assets without the participation of a third party.Using a decentralized wallet, you should understand that you have the full responsibility for managing funds. If you lose or forget your private key, the provider will not be able to recover the password or mnemonic phrase, since only you have access to the data. Therefore, we recommend storing the private key in at least two copies. But remember that only you should have access to the key data.
The next classification is based on Internet access. There are two types of wallets - cold and hot.
- A hot wallet is a wallet that is directly connected to the Internet. This type is the most popular, since such a wallet is easy to create and access. This makes it ideal for traders and just those who often conduct transactions with cryptocurrencies. The main disadvantage is that such a wallet is less reliable.
- A cold wallet is a wallet that works without access to the Internet. It is presented in the form of a flash drive that stores private keys, which helps to avoid data theft. Since this type is safer, it is most often used by long-term investors. Moreover, many cryptocurrency exchanges use cold wallets to store customer assets. This helps to avoid the risk of hacking.
The main classification of hot wallets is their separation into network, desktop and mobile.
- A web wallet is a wallet accessed through a browser. That is, you do not need to download any additional programs. Despite the fact that this type of wallet is the simplest, which attracts a large number of users, it has significant disadvantages.
First of all, such a wallet is easy to crack. Secondly, the provider may have access to your private key, which gives him the opportunity to take possession of your funds. If you have not been given a private key during the registration process, this means that third parties have access to your assets.
However, this does not mean that all web wallets are dangerous to use. To prevent hacking, providers allow customers to manage their keys completely or through common control using multi-signatures.
Tip. To ensure greater security, do not store money on cryptocurrency exchanges.
- Desktop wallet. This type of wallet is a software for installing and running on a computer. It is more secure than a web wallet. A desktop wallet gives you complete control over private keys. However, using this type of wallet, you must be sure that your computer is virus-free. Avoid sites and programs that could bring the virus to your computer and steal private keys.
- Mobile crypto wallet. This type can be called a subspecies of the desktop wallet. The only difference is that the mobile wallet is installed on your smartphone or tablet. Also, a mobile wallet makes it possible to complete transactions using a QR code, which greatly simplifies transactions. Mobile wallets are convenient for daily operations. But you need to remember that mobile devices are also prone to viruses, like computers. Therefore, check the sites you visit and use antivirus systems. Moreover, it is strictly forbidden to store keys in the public domain. Set an additional code in case you lose your phone or tablet, or they are stolen.
Choosing a Wallet
When choosing a wallet, you need to pay attention to security, user-friendly interface and a variety of functions. Atomic Wallet along with Samourai Wallet is one of the most popular wallets. A large number of positive reviews on such sites as Trustpilot, Play Market, App Store, give the right to consider it one of the best.
Atomic Wallet is a decentralized wallet that supports over 300 cryptocurrencies.
Atomic wallet allows you to steal cryptocurrencies, delegate funds to validators through its interface, which supports network decentralization. You also have the opportunity to buy and exchange popular coins, receiving a cashback for activity during the exchange of assets. Atomic Wallet offers an exchange of more than 60 coins anonymously.
Commissions in decentralized wallets
Most wallets are free and do not charge extra transaction fees. You only pay the commission set inside the blockchain. The commission is transferred directly to the participants of the blockchain, which ensure that the transaction is added to the system quickly and safely.
In a blockchain based on the Proof-of-Work protocol (for example, bitcoin), the commission goes to the miners. If we talk about the Proof-of-Stake protocol (for example, cosmos), then the commission is paid to the nodes that confirm the record. The size of the commission depends on the blockchain technology.
Tip. Despite the fact that some wallets have the ability to set minimum fees, it is important to remember that the size of the fee determines the speed of the transaction. The higher the commission, the faster your transaction will be conducted.
To summarize
Since cryptocurrencies do not exist in physical form, a wallet is the main means for user interaction with the blockchain for operations with crypto assets.
It is important to remember that a private key gives direct access to your assets, so your main task is to restrict access to it. The public key can be used to receive currency from other users.
There are several types of cryptocurrency wallets: centralized and decentralized, cold and hot, and web, desktop and mobile. The safest are decentralized, cold, desktop and mobile wallets.
