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Provided By VAT reporting software company, Sovos
Money is the influencer of all global changes. Recent years have been marked with increased attention (even craze) to cryptocurrency, which is the currency of the future and the source of wealth for its owners. One of the most important things about managing your money balance is keeping it safe. When we think about traditional forms of currency, everything is quite clear – there is a physical wallet, or a bank account which helps you track the flow of finance and perform various transactions. The crypto wallet is also a storage, yet it functions differently.
Let’s try to clarify together.
What is a crypto wallet?
A cryptocurrency wallet is a special application that performs a storage function. Unlike physical wallets, where you keep your money and cards, a crypto wallet app aims to keep your private key safe, not to store the currency. The wallet allows users to manage and trade their crypto belongings.
When opening the crypto wallet, every user is assigned and public and a private key.
- A public key is a large numerical value used to encrypt data. It allows to receive cryptocurrency transactions. This code is paired with the private key.
- A private key is used to verify the ownership of the wallet address, and the the transactions.
To put it simply, the public key is like a mailbox, where everyone can send something. Yet, it is the box owner who can access the content of the mailbox with the help of a key.
How does a crypto wallet work?
The wallets are typically software applications on various types of devices, which use an Internet connection to access the blockchain network. As long as the cryptocurrency is scattered around the database, the wallet helps to find all the bits and pieces associated with your public address, calculates them, and presents them in the interface of a chosen application.
Crypto wallets are highly-functional applications, as they allow one to send and receive cryptocurrency easily, using various methods. A typical transaction follows the same pattern:
- Enter the wallet address of the recipient,
- Type the amount you want to send,
- Sign the transaction using the key,
- Pay the transaction fee,
- Send the money.
Types of crypto wallets
All the cryptocurrency wallets can be divided into custodial and non-custodial:
- Custodial – the whole custody belongs to a third party, such as an exchange or online wallet provider, who keeps control over the keys. The user doesn’t have any access to the keys.
- Non-custodial – The owner of the cryptocurrency keeps control over the security keys in a non-custodial wallet, and thus, the digital assets. Such an ‘ownership’ allows direct interaction with the blockchain. This is the most common type of wallet.
There are also other subcategories which are hot wallet vs cold wallet that are based on connectivity:
- A hot wallet is always connected to the Internet, keeps the keys on a cloud storage, and provided access to the transaction anytime.
- A cold wallet stores the private keys offline, which makes it more protected from hacking.
The last three subcategories are – software, hardware, and paper crypto wallet. Each of the types can be either hot or cold, creating various combinations.
- Hardware Wallets
Hardware wallets are often more popular, as you can store and remove the keys from your device. The devices look like USB drives. The transaction can be performed on the device or computer by plugging in the hardware wallet. It is the safest option, as it is not vulnerable to hacker attacks.
- Software Wallets
Software wallets are applications installed on a desktop or a laptop computer. The applications help you access the cryptocurrency, perform transactions, show the balance, provide exchange integration, etc. Software wallets are typically hot wallets and are compatible with iOS and Android.
A software wallet stores and trades digital assets. It is free and convenient, yet, it lacks security – due to being constantly connected to the network, it is the most susceptible to digital fraud and hacking attacks.
- Paper wallets
A paper wallet is simply a sheet of paper with a private key printed on it. It can also contain QR codes to scan, for immediate access. Although paper wallets are a disconnected option, they represent the keys on the blockchain, which help to locate your cryptocurrency.
The takeaways
A crypto wallet is a basic need for everyone who is somehow involved in cryptocurrency deals. When choosing the right one, it is important to consider all the categories and subcategories, in order to fit your needs.
All crypto wallets aim to secure the private key, not the currency itself. If you are willing to keep control over the key, you need to choose a non-custodial option. There are also software, hardware, and paper wallet, which differ in the way of holding information. Hot wallets are always connected to the Internet, thus, they are better for those who need to interact with the crypto throughout the day.
