How Do Crypto Wallets Work?
This article begins by pointing out contrasts between a traditional bank account and a Crypto wallet further breaking down the “blockchain” wallet or Crypto wallets into how it functions within the digital market ecosystem, its types and usages.
You must already be aware of the increasing popularity of Bitcoins, Ethereum and Tether over traditional Fiat currencies whether you trade in Cryptocurrency or not. There is no denying that digital currency is quickly becoming famous and might in future, even become the mainstream currency, as Crypto.com owner Kris Marszalek opines. Before that occurs, let’s understand how different a Cryptocurrency wallet is from a usual bank account.
How does a Crypto wallet differ from a bank account?
The most striking contrast between a traditional bank account and a Crypto wallet is that, under banking systems transactions tend to be slower as the exchange goes through rounds of authoritarian security checks but in a Crypto wallet the transaction is directly between the sender and receiver thus occurring in a much less scrutinized environment. In traditional bank accounts, recordkeeping can be manipulated but in a Crypto wallet the financial history is stored in blocks which are highly confidential and absolutely immune to jeopardy or manipulation. Due to the complex nature of cryptographic security, it is nearly impossible to make fraudulent transactions in a blockchain wallet. Some common Crypto wallets are Blockchain.info, Jaxx, Electrum and so on.
How does a Crypto wallet function?
A Crypto wallet is more commonly known as a blockchain wallet and its function is similar to a bank account in that it allows the Crypto trader to maintain transactions across different kinds of Cryptocurrencies. Crypto wallets enable users to exchange money more easily and provide better security than traditional bank accounts. The crypto wallet is cryptographically signed and is accessible from all web devices including smartphones.
In order to understand how a Crypto wallet functions, one needs to know what private and public keys are. Whenever a trader creates a Crypto wallet, they are given a private key and a public key associated with the blockchain wallet. Let’s explain this through an email id. Suppose, you share your email address with a friend from whom you are expecting to receive mail. If you give out your email, it doesn’t mean your friend who has the id will be able to use your id to send emails to others. Your friend needs to have the password of your email address to do so. The crypto wallet’s public key is similar to your email address – you can share the public key with anyone. You can share the public key for receiving funds. In your crypto wallet, the private key is like your password. You have to keep your private key a secret as you keep your password. If a trader gets access to your private key, your Crypto wallet is at risk as the funds can easily be stolen or transferred into another wallet.
What are the types of Crypto wallets?
Blockchain wallets or Crypto wallets are of two kinds based on private keys – (i) Hot Wallets and (ii) Cold Wallets. While hot wallets are for everyday usage, cold wallets are for occasional use. Hot wallets are user friendly and similar to a daily wallet whereas cold wallets are like bank vaults where huge sums of Cryptocurrencies are stored under heavy security.
Crypto wallets can be further classified into three categories:
(i) Software wallets which are web-based wallets and can be accessed from the web no matter where the user is. Jaxx, Breadwallet and Copay are software wallets.
(ii) Hardware wallets are typically similar to USBs wherein private keys are stored. Hardware wallets are more secure and portable devices. For a transaction to occur, the device must be plugged into a computer. KeepKey, Ledge and Trezor are some hardware wallets.
(iii) Paper-based wallets are offline storage for cryptocurrencies. These are printed on paper having both the private and public keys of a trader and can be accessed using a QR code. These paper-based wallets are widely used for storing bigger amounts of currency. Some frequently used paper-used wallets are MyEtherWallet and Bitcoin Paper Wallet.