Hello folks! This article focusses on Crypto Wallets. We will learn about what is it, its types and which types are best for usage. Lets start.
Crypto Wallets are the User Interface for accessing your Crypto(like Bitcoin) in the blockchain. Simply put using a wallet you can access your crypto, manage or track your crypto, send or receive cryptos (your cryptos are stored in the Blockchain in the form of a transaction output).
Wallets contain pairs of Private and Public Keys, which can be used for different transactions. You can read more about Public Key, Private key and Addresses here.
The below information is also published in my earlier article here. I am pasting it here so that you can have all the required information in the same article.
On the basis of Form (Hardware and Software)
A hardware wallet is a physical electronic device or a hardware which is developed for the sole purpose of storing your Bitcoins (or cryptocurrencies). It can be plugged in to a computer, laptop, tablet or mobile to perform any Bitcoin Transaction of buy or sell.
A Hardware wallet is the most secure wallet to store your Bitcoins. See we know that if someone gets access to ourPrivate Keys means he/she will have access to the Bitcoins and perform transactions.
In a Hardware wallet the Private Keys are generated and stored offline. Unlike hot wallets where your Private Keys are generated online and hence vulnerable to the Hackers. Even if someone steals your Hardware Wallet you can secure it by generating a PIN, which will be required as soon as the thief will try and connect your Hardware Wallet with a computer, laptop, mobile or tablet.
Let us examine the Pros and Cons of using a Hardawre Wallet.
- Most secure form of storing your Bitcoins or cryptocurrency.
- Less margin for error; setup is easy for even the less Technical Users.
- Easy to backup and store
- Not free of cost. These wallets have prices starting of $50-$60. Hence in the beginning start with a Hot wallet which are free of cost (can be downloaded in your mobile or laptops) and eventually as you accumulate large amounts of Bitcoins, move to a Hardware wallet.
Pro tip: Always buy a Hardware Wallet with a screen which displays the details of the Bitcoins contained in the wallet. This helps in authenticating (by matching) the data that is displayed in a computer or laptop, when the hardware wallet is connected to one.
These are the wallets in the form of an application or a website which stores your Bitcoin online. Hot wallets are advisable to store only small value of Bitcoins. For the longer run, always prefer using a Hardware wallet.
Hot wallets can be thought of as your wallet which you carry in your pocket for storing some cash to be spent frequently. It is not used for storing your life savings. You need a Bank account. Similarly hot wallets are used when you want to store some Bitcoins and spend them frequently. However you will need a Hardware wallet in order to store your life savings of Bitcoins.
- Easiest way to store small amounts of bitcoin and crypto
- Convenient; spending and receiving payments is easy and fast
- Some hot wallets allow access to funds across multiple devices
- Free of cost (mostly)
- Not safe for the secure storage of large amounts of bitcoins and crypto
- You might forget about the application being installed on your phone
The table below lists the names of some of the best desktop and phone wallets.
|Type of Hot Wallet||Names of Wallets|
|Desktop Wallet||Electrum (compatible with Mac, Linux, and Windows)|
|iOS and iPhone Bitcoin Wallets||BRD, Edge|
|Android Bitcoin Wallets||BRD, Samourai, Mycelium, Edge, Blockstream Green, Bitcoin Wallet|
Should we buy a Hardware or a Hot Wallet.
Start with Hot Wallets and then eventually move to a Hardware Wallet.
Hardware wallets have prices starting $50-$60. Hence in the beginning start with a Hot wallet which are free of cost (can be downloaded in your mobile phone or laptops or desktops or tablets) and eventually as you accumulate large amounts of Bitcoins, move to a Hardware wallet which will keep them more secure.
On the basis of relationship between the keys contained in the Wallet
We know that a Wallet is a collection of pairs of Private and Public Keys. Private Keys are generated randomly, and Public Keys are generated from Private Keys. Now basis the generation of the Private Keys, the Wallet is categorized into a Non-Deterministic Wallet and Deterministic Wallet.
In a Non-Deterministic Wallet, each random Private Key (and the subsequently generated Public Key) is independently generated without any correlation with other Private Keys in the wallet. On the other hand in a Deterministic Wallet, we have a parent key called the Seed from which all the Private Keys and subsequent Public Keys are derived.
Hence for a Non-Deterministic Wallets, each time you want to sign a transaction or receive funds with a new pair of Private and Public Keys (to maintain anonymity and privacy), you need to back up the Key pair. This becomes cumbersome as the number of transactions increase.
On the other hand, in the case of a Deterministic Wallets you only need to back up the Seed. Each time you want to sign a transaction or receive funds with a new pair of Private and Public Keys (to maintain anonymity and privacy) you do not need to back up the new pair. Backing up the Seed or the Master Key is enough for retrieving all the generated pairs of Private and Public Keys.
P.S.: A Deterministic Wallet is recommended over a Non-Deterministic Wallet, as it reduces the complexity of backing up each pair of Private and Public Key pairs. You only need to back up the Seed or the Master Key.
There are a number of key derivation methods used in a Deterministic Wallet. The most common one is a Tree Like structure and is known as a Hierarchical Deterministic Wallet or HD Wallet.
Deterministic Wallets and HD Wallets
Let us reiterate and review the concept of Deterministic Wallets.
- Deterministic Wallets are wallets which contain Private Keys which are all derived from a common seed or master key through the use of one way Hash Function.
- The Seed is a random number generate at the time of the creation of the Wallet.
- Each of the Private Keys can be derived from the Seed itself. You only need to back up the Seed at the time of the creation itself.
- The Seed is sufficient also for the export and import to other wallets.
- Deterministic Wallets in which a Tree like (Hierarchical) structure is used to derive Keys from the Seed are known as Hierarchical Deterministic Wallets. Most modern wallets (since 2013) are hierarchical deterministic. Here are some popular examples: