Time is changing rapidly, and the technology revolution is taking steps in every field including the Financial sector. In the era of the internet and the complex matrix of different networks, one new concept has been introduced for the financial sectors to replace the conventional finance system. A new decentralized finance (Defi) system has been introduced as a game-changer in the modern world as it breaks every barrier to a centralized finance system. To enter and use this decentralized finance system all you need is a Crypto wallet, device, and internet connection.
What is a Crypto Wallet?
Assume that you are living in a house among the other small millions of houses in a giant metropolitan city. Every day, you go outside the city, buy something and come back home and store it in your house.
Now assume your house as a crypto wallet and that mega city where you are living as a blockchain. Whatever you transact, buy or trade on the blockchain, needs some space to store and claim your ownership of that buy. This space is called an address or crypto wallet.
Basically, a Crypto wallet is a unique distinct address on the blockchain network where you can store, buy or trade cryptocurrencies.
Need of Crypto wallets
In the real world, you need documents to claim your property and a Bank account to deposit money. On Blockchain, to store, trade, or buy any cryptocurrencies or digital currencies you’ll need a crypto wallet, which is simply a unique address with a long string of numbers and alphabets.
Crypto wallets assign you public and private key, which is required to make transactions on your crypto wallets such as buying, and trading. This key provides a digital signature to every transaction on the blockchain.
Keep aware of yourself, that keep your private key in a secure place as this key is required to enter in your crypto wallet. In case you lost that secret key then you will be not able to enter or log into your wallet and you would lose all your cryptocurrency.
In a nutshell, the need for crypto wallets is to retrieve or access your cryptocurrency. Here note that these crypto wallets are just used to access your cryptocurrency on the blockchain. Crypto wallets do not hold any cryptocurrency.
Types of Crypto Wallets
You can differentiate crypto wallets on the basis of two parameters. Firstly based on its internet connection and secondly on its accessibility.
Based on Connection
On network connection, you can divide crypto wallets between Cold wallets and Hot wallets. Here we are not going to the depth of this term, but we will help you to understand this complex terminology in simple words.
1. Cold Wallets
Here we go, cold wallets are those wallets, where you can keep your cryptocurrency offline as it comes with a physical body same as your USB drive. So, there is less chance of hacking or ransomware attacks on your address as it goes offline after your access.
The best examples of a cold wallet are ledger and Trazor hardware wallets.
2. Hot Wallets
Hot wallets are completely opposite to Cold wallets as they keep your address live 24*7. It comes with public and private keys and using it you can access your cryptocurrency across the internet. So hot allows you easy access to your cryptocurrency as you just need your phone and internet connection.
There are so many famous and widely used crypto wallets such as Metamask, Exodus, and others.
Now if we compare these both wallets then we can say this “both have limits”. As cold wallets are hardware so it is difficult to access and in case if you lose the device you will lose access to your cryptocurrency unless you have a backup (12 or 24-word keyphrase) stored safely. On the other hand, Hot wallet provides you easy access, but it is more vulnerable as they stay live on network 24*7 under the watch of a third party. Hot wallets are easy targets for the black hat hackers for their ransomware attacks.
Based on Accessibility
Now, you can also categorize your crypto wallets on the basis of their accessibility such as hardware, software, and paper wallets.
1. Hardware Wallets
Hardware wallets are simply cold wallets, which are compatible physical devices the same as a flash drive. It contains a public and private key to access your crypto wallets and make transactions through it.
The big advantage of the hardware wallets is that these wallets are less vulnerable as it allows you to keep your funds offline or isolated from the blockchain network. Also, One can create a seed phrase with a hardware device that can help one access their crypto if they lose their device.
A device like a ledger hardware wallet is one of the best examples of a hardware wallet. It is compatible with multiple applications and blockchain allowing the users to work with different crypto spaces from one device. Other popular hardware wallets include Trezor, KeepKey, and Prokey.
It could be a little bit expensive for you to purchase a Hardware wallet in comparison to a software wallet as it could be anywhere from $59 to $200.
2. Software Wallet
As the name suggests, software wallets are wallets that are developed through complex coding by blockchain developers. It comes in three forms: Desktop Wallets, Mobile wallets, and Web/ Online Wallets. Each type has its unique features and security measures to store and manage digital assets efficiently. Desktop wallets are popular for their robust security, whereas mobile wallets offer unparalleled convenience, and web wallets provide easy access from any internet-enabled device.
To stay informed on the evolving security protocols and features of software wallets, enthusiasts and investors alike turn to reliable crypto news sources.
i) Desktop Wallets
A desktop wallet is a computer program that is stored on a user’s PC or desktop, which allows them full control over the crypto wallet. Moreover, some desktop wallets also provide some additional functionality such as node software and exchange software. As the information revolves around your PC and doesn’t share information with other users or third-party so you can say you can keep your privacy in your safe hand using this wallet. In case your PC or Desktop suffers any hacking attack or Bug attack, your confidential information could be compromised by hackers.
Exodus, Atomic, and Electrum are the leading desktop wallet, which is most famous among investors.
ii) Mobile Wallet
A mobile wallet is an app similar to your Bank App or other digital wallets on your smartphone. Using this app developed by a third party, you can access and use your crypto wallet at any place around the globe through your smartphone.
At present, there are many different private companies that are providing a crypto wallet service for Android and ios users. It is advisable to choose your mobile wallet wisely as it comes with a disclaimer as your device can be compromised through its inside bug.
At present there are many different kinds of Mobile wallets available in the market and Trust Wallet, Math are the leading wallets.
iii) Web Wallets
Simply, Web wallets are nothing but just websites, which you can access from anywhere with any device. For example, BNBWall provides a simple, intuitive interface and reliable wallet. You just need cryptocurrency and a secret phrase to access your crypto wallet. Keep in mind that the private keys are stored by the website owner or developer instead of the user device.
3. Paper Wallet
A Paper Wallet is just a piece of paper that contains all the required data such as keys and QR codes to make cryptocurrency transactions. Paper wallets were considered to be safe as these wallets are removed from the internet after transactions. Also, these wallets were very famous at the beginning of the Bitcoin induction. But, many investors and traders do not rely on the paper wallet because of associated risk in the case of paper misplacement.
Custodial Wallets and Non-Custodial Wallets
All these wallet types can also be classified in two different categories, Custodial Wallet and Non-custodial wallet. Let’s try to understand through an example.
You can compare custodial wallets with Gold locker rooms (if you’ve any then you are a lucky one). Where you hand over your jewellery to the bank or any other trusted and reputed authority to keep it safe. Custodial Wallets work in the same manner, but here your locker is in digital form.
Many Crypto investors worry about their private key and don’t want to take risk of losing it. To keep their investment safe, they transfer their funds to reputed and trustworthy custodial wallets.
In Custodial Wallets, Investors give Private keys access to the third party, and in return, the third party ensures the security of individual funds. Most custodial wallets are crypto exchange platforms and stored in hardware wallets. The best examples of custodial wallets are FreeWallet, Coinbase, Binance, and BitMex.
While choosing a custodial wallet, keep in mind that it should be reputed, trustworthy, and secure. In case of a cyberattack or bug exploit, your private key could also be compromised. Rather than that, you should prefer cold storage or a hardware wallet as your custodial wallet, because they provide better security.
Despite trusting any third party or custodial wallet platform, it’s better to manage your fund on your way. That’s what responsible crypto investors do. Many crypto whales hold their funds into non-custodial wallets, which is a safe move.
In Non-Custodial wallets, investors hold the private key, which means they have full control of their funds. Non-Custodial wallets could be in any form including browser-based, software-based, or hardware same as USB. a large number of crypto holders opt for hardware wallets.
The best examples for Non-custodial wallets are Trezor One, Meta Mask, Brave, BSC.
As you are the only person who knows the private key of your Non-custodial wallet, it becomes your responsibility to keep it safe. If you lose your private keys or password, you will no longer be able to access your fund, which means a total loss. To avoid the risk of fund loss, write down your password somewhere only you can access it.
In case you lose your password, you don’t need to worry. You can retrieve your account through “Seed Phrase” of 12, 18, or 24 words, which was prompted during account setup.
Choosing a crypto wallet entirely depends on a person’s needs as a user. There is actually no best crypto wallet. Rather, the best crypto wallet for a person depends upon what the person intends to do with their holding. If you want to “HODL” crypto-currency, then you should put your digital currency in cold wallets. If you plan to be a regular crypto trader, it is easy to hold your crypto-asset in hot wallets.