Crypto Wallets

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Crypto Wallets Overview

What do we mean by Crypto Wallets?

Crypto wallets are essential tools for blockchain users, enabling interaction with decentralized applications, the storage of digital assets such as cryptocurrencies and NFTs, and more.

A web3 wallet, also known as a crypto wallet, can be a digital application or a physical device that safeguards your private keys. These keys are necessary for managing and accessing your digital assets like cryptocurrencies and NFTs. Each wallet comes with a unique private key, which is needed to access the funds and assets within that wallet. Without this private key, one cannot access or transfer the digital assets within the wallet.

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Frequently asked questions

When a user generates a web3 wallet, they are given a unique private key, which is then used to create a matching public key. These keys work in tandem to allow web3 wallets to establish digital identity and confirm digital asset ownership securely and in a decentralized manner.

Web3 wallets also provide users with a unique "public address" used to receive digital assets. This address, derived from the public key, can be shared publicly, enabling others to send digital assets to the user's wallet. The public address can also be linked to a decentralized name service for easier recall and interaction with your wallet's public key. For instance, in the Ethereum blockchain, an .eth domain can be registered to your wallet via the Ethereum Name Service (ENS).

There are various types of web3 wallets, mainly "hot" and "cold" wallets.

"Hot wallets" or software wallets are connected to the internet, providing easy access and management of funds but are more prone to hacking and other security risks. They are typically used for storing small amounts of cryptocurrency for frequent trading or spending.

Among hot wallets, there are desktop wallets that are installed on computers or laptops, allowing users to manage their cryptocurrency directly from their device. These wallets can be software-based or web-based and are generally considered more secure than online wallets, but less secure than hardware wallets.

On the other hand, mobile wallets are designed for smartphones or tablets, providing the convenience of managing cryptocurrency directly from a mobile device. Like desktop wallets, they can be either software-based or web-based. While they offer access to funds anytime and anywhere, they are generally considered less secure than hardware wallets due to their internet connectivity and vulnerability to cyber threats.

A cold wallet, or a hardware wallet, is a type of web3 wallet that is not connected to the internet, providing an enhanced level of security for the stored funds due to its offline nature, making it harder for hackers to access them. These wallets are often used for storing large amounts of cryptocurrency over the long term that aren't frequently traded or spent.

Cold wallets are typically synonymous with hardware wallets, which are physical devices, such as USB drives, that store the user's private keys. While they offer improved security, they require physical storage and make accessing funds somewhat more challenging.

Non-custodial wallets and custodial wallets represent two different types of web3 wallets.

Non-custodial wallets give users full control over their funds by granting them ownership of the private keys. This setup means the user bears full responsibility for their funds' security, and no third party, including the wallet provider, can access these funds. As such, non-custodial wallets are generally considered more secure than custodial wallets, as they remove the risk of funds being compromised due to third-party actions or security breaches. These wallets can be software-based (desktop, mobile, or web) or hardware wallets. Examples include Coinbase Wallet, MetaMask, Phantom, and Rainbow Wallet.

On the other hand, custodial wallets involve a third party, often an exchange, holding and controlling the private keys on the user's behalf. As a result, users do not have full control over their funds, and the third party has access to them. While this means that the user is not solely responsible for the security of their funds, it also introduces the risk associated with the third party's actions or security. Examples of custodial wallets are typically exchanges that facilitate cryptocurrency trading or some online and mobile wallets provided by specific companies or organizations.