Talking about digital money, you might be wondering where will we gonna keep it?
For fiat money, we have bank accounts, wallets, etc. But what about cryptocurrency? Maybe a digital wallet like Paytm or PayPal.? Or a digital bank? But these are centralized units and have access to our money. There has to be some decentralized wallet system to store cryptocurrency owned by a person.
And There is!! Guess the name !! ;)
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CRYTO WALLETS!! HEHE!
So, How they differ from traditional wallets?
The major difference here isn't that no third party is involved because it CAN BE! YES!
The major difference here is that user has a choice if it wants a third-party to access their wallet. This is generally done for ease of transactions and backup mechanisms.
A blockchain wallet is a kind of digital wallet that allows user to store funds in a decentralized manner. Their is no central unit keeping track of accounts and balances and therefore offer speedy transaction service with lower transaction fees across geographies without any limit. User can store multiple cryptocurrencies in the same wallet with the ease of conversion of currencies.
Coming to working of a blockchain wallet, we will first understand the concept of authentication and account access. These are done with the help of cryptographic key pair: public key and private key. A public key is a derivative of the private key. A private is unique in nature. Let's take the example of email. For receiving mails, you only need to share your email id. This information can be made public and is required to receive mails. But when you need to send an email you need to login to your email account using a password that is kept secret with you. This password must be secured by you to prevent unauthorized access to your account. In the same way, public key can be thought of as your email id and private key as your password. While public key is broadcasted to the Blockchain network, private key remains secret with the owner and must not be shared with anyone. A private key is used to sign the transactions sent by the user and can be verified only by the sender's public key. This provides security and integrity to the network. Many powerful algorithms have been created to generated a cryptographic key-pair.
Having talked about working of the Blockchain wallet, let's discuss different types of wallets.
A broad categorization of crypto wallets can be done with Hot and Cold wallets.
A Hot wallet is the online wallet that is imperatively connected to the network 24x7 and ensures faster real-time transactions across the Blockchain. The private keys of the user are stored on the cloud or the internet and can be accessed easily via Desktop or mobile. But these type of wallets are highly prone to unrecoverable theft if hacked. They also lack backup mechanism: Once the online service fails user data cannot be recovered.
On the other hand, a cold wallet is an offline representation of wallet where user doesn't to be connected to the internet 24x7. Here user can conduct and sign transactions in offline mode and can later disclose them online. The user accounts details and funds are stored off-the-internet like desktop of a secondary storage device or even on paper. It ensures high security as there is an efficient backup method and this transaction methods prevents unauthorized access to user's information.
There is also a warm wallet type that is a hybrid of both of the above wallet types. Here the wallet is connected 24x7 to the internet but stores funds in cold storage. This ensures easier and faster transactions across the network with securing the user's information offline.
Based on above categorization, wallets can be further classified into Software, Hardware and Paper wallets.
Software wallets:
As the name suggests, these refer to wallet applications created for easy-to-use purpose. Breadwallet, Jaxx, and Copay are popular software wallets. Software wallets are to be downloaded on user's device and therefore can be further classified into Desktop, online and mobile wallets.
Desktop wallets:
These wallets are downloaded on the user's desktop or local machine as an application and therefore use cold storage to store the private key of the user on the cold server (local machine). The wallet application can be unplugged from the internet anytime and user can conduct some offline transactions. This provides a backup storage for user to store their information on their own cold server. The user account can only be accessed by that particular device only and hence he/she has to keep their device safe. These are really cost-efficient wallets. For example, Electrum is quite widely-used desktop wallet application.
Web(Online) Wallets:
Web wallets user hot wallet mechanism and user needs to be connected to the internet to conduct transactions. These can be accessed anytime anywhere through any device as long as you have login details with you. These ensure faster and ease of transaction across the network. The private keys are stored online and are managed by a third-party. For example, GreenAddress is a popular web/desktop/mobile wallet for Bitcoin.
Mobile Wallets:
Mobile Wallets differ from Web wallets in only one aspect that is they can only be installed on mobile phones. They have a user friendly interface with ease of access to your details and funds. Mycelium is one of the mostly used mobile wallet.
Hardware Wallets:
Hardware wallets are typical cold wallets using hardware storage devices such as USB where the private key and all the sensitive information is stored. These wallets are like portable devices that can be plugged to any device and transactions can be conducted. Due to such high backup mechanism, these wallets are quite less prone to malicious activities. Ledger, Trezor, and KeepKey are the top hardware wallets in the market.
Paper Wallets:
Paper wallets are quite typical to cold wallets. It is an excellent tool ensuring much high level of securities. Here the private keys and other details are stored on a printed paper and can be accessed using QR code. These are widely used to store large amounts of cryptocurrencies. The paper wallet connects to a software wallet using QR code and transactions can be conducted thereafter. Users can send funds using recipient's public key as printed on their paper wallet. Bitcoin Paper Wallet and MyEtherWallet are two widely used paper wallets.
Now, since we got this far, let's now see how wallets can be classified on the basis of accessibility.
The Custodial and Non Custodial Wallets:
A custodial wallet is the one where a third-party holds and manages your private key. It has access to all you sensitive information and you just have to permit it to transfer and receive funds from across the Blockchain network. While on the other hand, non-custodial wallet allows you to be your own bank. Only you have access to your funds and can conduct transactions all by your own.
Non-custodial wallets provide real-time transaction reflection on chain which is not in the case of custodial wallets. Non-custodial wallets provide greater security as the information is stored with the owner only and therefore less prone to be hacked. They also offer offline accessibility to the information to the users. But at the same time they lack backup and recovery property because once the data is lost, it is nowhere other than the owner.
On the other hand, provide great backup and recovery mechanism as the information is stored by the third-party and can be retrieved anytime, but at the same time they lack security and offline accessibility as the information has to be requested by the third-party over the internet.
Therefore, in majority of the cases, Non-custodial wallets have proven their edge over custodial wallets and have greater future scope.
Quite enough for now. Let's take a pause here and will come back soon with another Hot topic.
STAY TUNED and keep learning Blockchain!
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