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Crypto wallets

Lesson in Course: Crypto (beginner, 6min )

How do we use cryptocurrency?

Unlike traditional wallets that hold our cash and credit cards, crypto wallets don’t actually store cryptocurrency. We can think of Crypto wallets as gateways or tools that allow us to communicate with a blockchain network, like Bitcoin or Ethereum. The wallet generates the information (public and private keys) we need to use cryptocurrencies.

Wallet keys

Public vs Private keys

Remember, all transactions with cryptocurrency (on a blockchain) are public, so they are encrypted using a pair of public and private keys for security. Public keys encrypt the transaction, while private keys decrypt the transaction. 

Private keys provide signatures for transactions, give access to funds, and can be used to access our coins on any device. If someone steals our private keys, then they could steal our crypto. 

WE SHOULD NEVER SHARE OUR PRIVATE KEYS!!

Some wallets use seed phrases which are simply a list of words we use to recover our funds on the blockchain. We should write down the seed phrases when we open our wallets. Keep the seed phrases in a safe place in case we need to access them later. If we lose them, we could lose our crypto forever.

Types of crypto wallets

Hot vs cold wallets

We can think of wallets as either being hot or cold. 

Hot wallets are connected to the internet. They are more convenient to use for trading and making transactions.

Cold wallets are not connected to the internet. They are a physical device that holds the keys offline, making them a safer alternative and more resistant to hackers.

 

3 forms of wallets

Aside from the hot vs cold wallet types, there are 3 forms of wallets with different advantages and disadvantages.

Software wallets are usually connected to the internet, making them hot wallets. They are web, desktop, or mobile applications that are convenient for using and trading cryptocurrency.

Web wallets use a browser, so it doesn’t require any installations on our computer. Desktop wallets are downloaded on our computers and are considered safer than web wallets. Mobile applications are similar to desktop wallets but specifically designed for smartphones, making them convenient for accessing our coins anywhere.

Software wallet

We can get started by using MetaMask, a desktop/mobile wallet packaged as a browser extension. The wallet gives us access to the Ethereum ecosystem which means we can immediately start interacting with blockchain-based applications.

Here is an article with some extra information about MetaMask:

Hardware wallets are physical devices that we connect to our computers, making them cold wallets. The device randomly generates public and private keys stored directly on the device behind additional security layers. They are less convenient for making transactions but tend to be more secure and better for long-term investors holding coins.

Hardware wallets

We can check out Trezor and Ledger for hardware wallets.

Paper wallets are obsolete and unreliable. Software and hardware wallets are better alternatives.

Supplementary materials

The video below provides more details about the basics of crypto wallets:

Glossary

Crypto wallet

Gateways or tools that allow us to communicate with a blockchain network, like Bitcoin or Ethereum. They generate the information (public and private keys) we need to use cryptocurrencies.

Public key(s)

Used to encrypt a transaction on a blockchain - paired with a private key

Private Key(s)

Used to decrypt the transaction from a paired public key. Private keys are signatures for transactions, give access to funds, and can be used to access coins/tokens on any device. NEVER SHARE PRIVATE KEYS!!

seed phrase(s) 

A list of words that can be used to recover funds on the blockchain. KEEP IN A SAFE PLACE AND NEVER SHARE SEED PHRASES!!

Hot wallet(s)

Crypto wallets that are connected to the internet. They are more convenient to use for trading and making transactions.

Cold wallets 

Crypto wallets that not connected to the internet. They are a physical device that holds the keys offline, making them a safer alternative and more resistant to hackers.

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