Contrary to popular beliefs, Crypto wallets don't really store cryptocurrencies, instead, they work as a sort of gateway providing the tools you need to communicate with a BlockChain. In other words, these wallets can generate all the information you need to use cryptocurrencies. Crypto wallets allow you to transfer and receive money over blockchain networks. They enable you to purchase, sell, store, and manage your transactions, as well as track the balances of your crypto assets.
To understand the working of Crypto Wallets, one must know about Public and Private Keys.
A cryptocurrency wallet (hot or cold) has both a public and a private key. The wallet address is represented by the public key , which is a lengthy string of numbers and characters. It is comparable to a bank account number.
The private key grants access to the wallet's money that is kept in the blockchain. If your public key is analogous to your account number or IBAN, your private key is analogous to the login and password you use to access your online banking accounts. It is critical to keep it hidden and secure.
Let's understand the working with an example.
Imagine that you want to build a brand-new wallet to receive a payment from your best friend. The easiest way for you to do that is to use a crypto wallet program. When you create a new wallet, the program generates multiple pairs of public and private keys along with several blockchain addresses. Let's consider only 1 pair of keys and a single address. First, the program calculates the pair of keys - here, one public key and one private key. Next, the public key is used to generate a unique cryptocoin address. This is the address you need to provide your best friend. Your friend will then send the coins from his wallet to your wallet.Note, that the coins never leave the blockchain, they are just transferred from one address to another. One should never disclose their private keys to anyone. The private key is used for signing new transactions and is what gives access to funds, so even if you lose your computer or smartphone, you could use your private keys to access coins from any other device. If anyone knows your private key, they can steal your funds.
There are different sorts of crypto wallets. The various types of wallets can be divided into 3 main groups: Software, Hardware and Paper Wallets
Depending on their working mechanisms, they may also be called hot or cold wallets. Each wallet type (hot, cold) has benefits and drawbacks, therefore it's critical to understand how they operate before transferring funds.
A hot wallet is any wallet that is always linked to the internet. Unlike traditional currencies, there are no specific banks or physical wallets for storing crypto holdings. They are simple to set up, user-friendly in general, and the money is easily available, making them ideal for traders and other frequent users. Hot wallets are more vulnerable to attacks and theft than cold storage solutions since they are connected to the internet. Hot wallets are associated with public and private keys, which simplify transactions while also serving as a security mechanism. Hot wallets are classified into three types: Web, desktop, and mobile.
Web wallets make it possible to access Crypto coins from any location, using any browser or mobile device. Because your private keys are stored online, you must choose your web wallet wisely. A browser interface is used to access web wallets. These wallets are often the easiest to set up and use since users do not need to download or install anything. It is free and to make an account with most services, all you need is an email address and a password.
b. Desktop Crypto Wallets
Desktop wallets give a rather high level of security because they are only accessible from the system on which they are installed, and most of them provide a recovery code when installed in case you lose or damage your computer. They are often simple to use, and most of them are free. A desktop wallet is a software package that can be downloaded and installed on your computer. The main downside of desktop crypto wallets is that they rely on the owner to maintain the computer safe and malware-free. As a result, a strong antivirus and firewall are required.
vs. Mobile Crypto Wallets
Mobile wallets are similar to desktop wallets, however, they operate as an app on your smartphone. However, one must be extremely cautious not to lose one's smartphone and to keep it as accessible as possible.
A cold wallet is also called an offline wallet. The cold wallet saves the user's address and private key and works with compatible applications on the PC. Funds, on the other hand, are more difficult to obtain than hot wallets. As a result, cold wallets are better suited to long-term investors.
Two different types of cold wallets are present: Paper and Hardware.
at. Paper Crypto wallets
A paper wallet, as the name implies, is a piece of paper that you print off and record all of the information needed to access your assets (usually in the form of QR codes). These codes can then be scanned in order to carry out cryptocoin transactions. Paper wallets offer the distinct virtue of being both safe and free, which no other wallet can offer. The disadvantage of paper wallets is how easily they may be lost or destroyed. There is no alternative method to reclaim your valuables if this occurs. Furthermore, because your information is clearly exposed on a piece of paper, you must be cautious about how you preserve it.
b. Hardware Wallets
Hardware wallets are tangible technological devices (such as a USB key) on which the information needed to access your funds is encrypted: neither you nor anyone else can access them. Most hardware wallets now let you set up a PIN number to safeguard your device, as well as a recovery phrase - which may be used if your wallet is misplaced. Because of their high level of security, hardware wallets are quite popular. However, they may be costly and difficult to manage.
We've arrived at the end of our journey through crypto-wallets. So, what have we discovered? Crypto wallets allow you to transfer and receive funds over blockchain networks. Each wallet type (hot, cold) has benefits and drawbacks, therefore it's critical to understand how they operate before transferring cash.