How do the different types of crypto wallets work?
Crypto wallets allow you to receive, store and send your digital money by storing the keys that point to your assets on the blockchain.
A crypto wallet is a software or digital device that allows users to access cryptocurrencies. Digital currency is different from fiat, where you keep bills and coins in your pocket and can see your balance in each currency online. It is only available in digital form and should be stored in such a way that it can be recognized by other market participants.
Unlike your traditional wallet, a cryptocurrency wallet does not store your crypto assets. Instead, it stores asset credentials, called private keys. These keys give you access to the assets held on the blockchain.
What you can do with a crypto wallet
A crypto wallet can send, receive and pay accounts. You only need the recipient’s wallet to send all payments with crypto. On the other hand, you need to give the sender your wallet address to receive money from them:
- Storing Crypto: Most crypto wallets allow you to store different types of coins in one place. If you trade with different coins, you don’t need to open a wallet for each one.
- Create a digital safe that only you have access to.
- This allows you to interact with web3 applications that allow you to lend money and borrow against the crypto assets you hold.
- Sell, buy and store any NFT
- Earn coins from any of the crypto rewards accounts you work with.
Crypto Wallets – How do they work?
There are three parts to the crypto wallet, including a private key, a public key, and a public address to receive your assets. Each time you send crypto, you must log in with a private key and then confirm the transaction. When you confirm the transaction, you sign the transaction. The digital signature becomes the unique fingerprint used to confirm the transaction. It also proves that the transaction is from the rightful owner of the wallet and cannot be faked along the way.
Differentiate between public and private keys
All crypto wallets start with a private key. This key is long and random and contains a string of numbers and letters. The key can be a mnemonic phrase or the QR code. The wallet uses this key to generate a public key by encrypting it. It is easy to check if a public key matches a private key. However, you cannot reverse engineer the keys to determine the public key or private key codes.
This technology is called “trap door” encryption. This is a one-way encryption that allows crypto wallet users to share their addresses with anyone without worrying that someone could look at their private key and gain illegal access to their money.
Additionally, the public key then undergoes a mathematical function that compresses it to an address that would receive money. The receiving address is usually in the form of QR codes or a shorter string of numbers and letters. This is where your senders put the money. A private key can generate several public keys, each with its own address. You can then use each to request money from different people.
The requirement to generate keys is not a requirement every time you want to buy or receive money. It is usually stored in the application and does not require your intervention.
Are crypto wallets secure?
Yes, crypto wallets are secure as long as you take the right steps to prevent access. These wallets are based on cryptography, the science behind protecting data using codes and puzzles called ciphers. When you sign a transaction using your private key, the blockchain network is able to verify and determine that the details are correct without disclosing the confidentiality of the information.
Crypto wallets can manage the keys for you to reduce the risk of losing the information. However, remember that anyone with access to the private key can access and move your money. Therefore, it is important to keep the key private.
Types of Crypto Wallets
There are two types of crypto wallets: custodians and non-custodials.
Custody wallets are also called trading accounts. They are a way to entrust your private key to a third-party provider such as a crypto exchange. It offers an easier method of accessing and transacting with your crypto, especially for beginners.
These wallets cannot access decentralized finance or web 3 applications. However, they are more knowledgeable about users who invest with custodians. These custodians apply identification methods such as the Know Your Customer and Anti-Money Laundering systems.
These wallets are also called “private key” wallets. They give you full control over the private and public keys. In essence, the cardholder is their own bank and can do whatever they want with their money. They can also use the wallet to access decentralized or web3 financial applications.
It is unfortunate that there is no way to determine whether whoever is operating the non-custodial account is being operated by the person who owns it. In addition, it is also possible to lose private keys by losing wallet details or through an online scam, which could lead to loss of funds.
Choose the crypto wallet that meets your needs. If you’re just starting out, opt for a custodian as it provides a better user experience and additional security measures.
You can use any of the crypto wallets to transact online. Many e-commerce platforms today accept many of the major digital currencies. Several gaming platforms also accept this type of currency. If you want to start playing on such platforms, check out the crypto gambling guide for more information.
Disclaimer: The information contained herein is provided without regard to your personal circumstances and should therefore not be construed as financial advice, investment recommendations or an offer or solicitation for trading in crypto- currencies.