Defining Cryptocurrency & Crypto Wallets
The cryptocurrency was once thought to be just a technology demonstrated, but today, discussions are underway whether or not to accept cryptocurrency as a valid method of payment. The endorsements by big names like Elon Musk have been instrumental in changing the perception and fate of cryptocurrency.
Although a lot of people might not understand the technology that goes behind these decentralized digital coins, they use cryptocurrency wallets to store their crypto assets. A crypto wallet is a software storage mechanism that holds your cryptocurrency.
Understanding The Basics
Before we jump into cryptocurrency wallet development, we will need to understand how a cryptocurrency wallet functions. Unlike the traditional “wallet“ that serves to store paper currency and coins, a cryptocurrency wallet does not actually store but rather facilitates access to common storage. It can be considered quite similar to your banking interface username and password.
Every cryptocurrency wallet is assigned a unique address and that address will serve as a pointer to which crypto assets need to be sent and will also show from where the crypto coins were sent. To access your cryptocurrency wallet, you will need to use a combination of two credentials called the public and private keys. It can be considered similar to your username and password in a diluted context.
The Different Types of Wallets
There are different types of cryptocurrency wallets, and they have their own classifications. The classifications are based on the type and also on whether or not they are connected to the network.
➜ Cold Wallet
As you may have guessed, the cold wallet is the one that is not connected to the network. Since it is out of the network, they are considered extremely secure. There are two major types of crypto cold wallets. This type of wallet gets its name from the “cold storage” type of crypto storage it facilitates.
➜ Paper Wallet
The paper wallet is nothing more than a piece of paper that has the public and private keys printed on it. Some paper wallets are known to have QR codes that can be scanned to access your crypto wallet and the funds stored in it.
They are considered the most secure type of wallets. There are a few disadvantages as well. When you use a paper wallet, you are expected to mandatorily transfer or use all the funds that you have stored in the wallet. There is no room for partial settlements. It is as secure as how secure you have kept your piece of paper! The only vulnerability of a paper wallet is in terms of human errors.
➜ Hardware Wallet
A hardware wallet is, in most cases, a USB device that can be plugged into your desktop computer. Once it gets connected to the network, you can transact your crypto funds. Unlike paper wallets, hardware crypto wallets give you an option to partially trade.
They are also considered extremely secure, only next to the paper wallet. However, your hardware wallet is vulnerable to viruses and malware that might have affected your computer. Therefore, you must keep your computer away from viruses and malware at all times. You will need to have the latest version of reputable antivirus software installed on your computer. You also need to take care that you do not download unwanted and unrecognized files from the Internet, which might corrupt your hardware wallet.
➜ Hot Wallet
A wallet that is connected to the network is termed a hot wallet. These are the wallets that can be used for transactions and they are useful only when connected to the network. Although they might be comparatively less secure than cold wallets, they present a lot of practical advantages and better usability.
➜ Desktop Wallet
A desktop wallet is an installable piece of software that you can use to store, send, and receive your crypto assets. These wallets require your computer to have certain configurations and hardware. They are extremely user-friendly and they are relatively more secure than the other hot wallets. However, they need to be protected from unauthorized access, viruses, malware, and any other vulnerabilities that might affect your computer.
When you use a desktop wallet, it is strongly recommended that you keep your credentials protected and also have proper firewalls installed.
➜ Web Wallet
The web wallet is something that you can access from your browser. It is openly available across the Internet, and you can use them to store, receive, and send cryptocurrency. It is considered to be the most insecure wallet, but it also gives better ease of access.
All you need to do to access your crypto funds is to have a computer capable of accessing the Internet. Web wallets are susceptible to almost every type of cyber attack that a website can experience, including but not limited to phishing, spam, denial of service, hiking, and Internet eavesdropping.
➜ Mobile Wallet
A mobile wallet is nothing more than a mobile app that you can download on your smartphone and use like any other app. It is considered to be safer than the web wallet but less secure than its desktop counterpart. A mobile wallet gives you the convenience of access. It is quite likely that you will have your smartphone in your hand at all times, and it means that you are never away from accessing your crypto funds.
A mobile wallet mandates that your mobile is secure. It is required that you protect your mobile access with a pattern or a fingerprint. You will also need to take care not to download malicious applications or visit suspicious websites on your mobile browser.
Custodial vs Non-Custodial Wallets
Beyond the classification that we have talked about above, we also have another kind of classification that divides wallets into custodial and non-custodial wallets. A custodial wallet would mean a considerable degree of centralization. The wallet stores the private keys of customers, and this would mean that they can recover lost private keys, which are otherwise considered to be non-recoverable.
The extent of centralization makes it susceptible to data breaches that any centralized organization can suffer. However, the availability of assistance and support makes it a favorite among people who prefer usability over security.
Non-custodial or decentralized wallets, sometimes referred to as DeFi wallets, provide complete ownership to the user not only over their funds but also over the credentials. On the flip side, it means that if the private keys are lost, your access and the funds behind them are lost forever. They are extremely immune to data breaches, and they uphold the virtue of decentralization which is supposed to be a core attribute of blockchain technology.
The Advantages of DeFi Wallets
DeFi wallets present quite a lot of advantages. Since the private keys are not stored anywhere, it makes the entire ecosystem extremely secured. DeFi wallets mandate two-factor authentication. It adds a layer of security protecting crypto funds from unauthorized access. Another factor that ensures better security is multi-signature authentication. It means that more than one signature is required to access a particular account. There are transaction limits that will not even let the owner of the wallet withdraw the entire amount. This protects the funds because even in the event of unauthorized access, the malicious user will not be able to withdraw all the funds.
With the growing emphasis on decentralization and security, DeFi wallets may become the order of the future. If you are one of those aspiring entrepreneurs who would like to build your own DeFi wallet, all you need to do is get in touch with a company that specializes in DeFi cryptocurrency wallet creation.
They will take care to understand your requirement and complete the process of DeFi wallet development, so you can launch your own crypto wallet business… With the attributes of blockchain intact!
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Everything you need to know about Crypto Wallet – A Detailed Guide was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.