What is a Crypto Wallet?

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What is a Crypto Wallet?

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Based on their types, crypto wallets help you access your crypto assets created on a blockchain network. Crypto wallets act as an interface between you and the blockchain systems, allowing you to interact with the technology easier.

Crypto wallets are categorized in different ways based on their functionalities. One subcategory defines crypto wallets in 3 different types: paper wallets, software wallets, and hardware wallets.

In this article, you will learn about different types of cryptocurrency wallets and how they help you to access and manage your cryptocurrencies.

What are crypto wallets?

Cryptocurrencies are bits of data created and stored on a blockchain network. Crypto wallets help you to manage your crypto holdings through a user-friendly interface, saving you the trouble of dealing with complicated codes.

Unlike physical wallets, cryptocurrency wallets don’t store your real cryptocurrencies. Instead, they keep the access keys to those assets, also known as private keys.

By owning private keys, you’ll be able to prove the ownership of your cryptocurrencies and therefore spend and transfer them.

Crypto wallets create an address based on your public and private keys that you can use to send and receive cryptocurrencies.

Through your crypto wallet, you can sign the transactions using your private keys which proves you are the true owner of those assets.

As the name suggests, you can share your public or wallet address with other people, however, the private keys need to be stored in a secure and secret place as anyone with those keys can access your funds.

What is a seed phrase?

Aside from passwords, crypto wallets may work with a seed phrase.

A seed phrase is regularly a set of random words, between 12 to 24. This phrase essentially allows you to access your wallet or recover your funds in case you forget your password.

It goes without saying that the seed phrase is quite important and you need to store it in a secure and secret place.

If your device, which holds your private keys, is damaged or stolen, you can use your seed phrase to recover your funds.

Types of crypto wallets

Crypto wallets come in different types and can be categorized in different ways based on their functionalities.

Hot vs. cold wallets

The main difference between hot and cold wallets is their connectivity to the internet.

Hot wallets have access to the internet connection. They are mainly used by crypto trading platforms as they need to transfer funds quickly according to traders’ needs.

Cold wallets, on the other hand, are air-gapped, meaning they don’t have access to the internet. With cold wallets, your private keys are stored on a storage device through a physical medium.

Cold wallets are safe against online threats and hacks as they are completely offline. However, when it comes to transfers, they can be slow.

Hot wallets, on the other hand, are quite convenient in terms of accessibility, however, they are exposed to cyber security dangers.

Therefore, cold wallets are usually used for long-term investments or HODLing while hot wallets are only used for trading and short-term use cases.

Hardware vs. software wallet

Software Wallets

Software wallets come in form of applications that mostly connect to the internet, therefore, they are also considered hot wallets.

Software wallets can have different types:

Desktop Wallet

An application that you install and run on your personal computer. In this type of wallet, your private keys are mostly stored on your local hard drive.

You have to make sure to get regular backups of your files and keep an updated anti-virus on your computer to keep it safe against viruses and malicious applications.

Web Wallet

You can access this kind of wallet through a browser either by opening the relative web page or installing the wallet extension. Web wallets usually keep your cryptocurrencies on your behalf by storing them in their own hot or cold wallet.

DIFX offers a web wallet, however, you will remain the owner of your assets. Thanks to its partnership with Fireblocks, one of the most reputable digital asset custodians in the world, DIFX keeps your crypto assets with a secure and trustworthy custodian.

Mobile Wallets

Just like desktop wallets, mobile wallets are installed on a mobile device. They are quite convenient to use as they allow you to send and receive funds by scanning QR codes.

Mobile wallets are also subject to malicious applications, therefore, it’s essential to get regular backups of your files.

Hardware wallet

Hard wallets present one of the most secure storage options for crypto assets.

They create the wallet address using offline tools and you can make transfers by plugging the wallet into your computer.

Hardware wallets are considered cold storage as they don’t have access to the internet for security reasons. They are mostly in the shape of a USB drive and are available with different features and functionalities.

Paper Wallet

Paper wallets were used by early users. As the name suggests, users would keep their private keys or seed phrase on a piece of paper.

Paper wallets can be damaged quite easily and are hard to keep safe. However, they can be used as an extra option for crypto storage alongside other modern alternatives.

How do crypto exchanges store your cryptocurrency?

Centralized cryptocurrency exchanges mostly use both hot and cold wallets. They store most of the users’ funds in their cold wallets while keeping a sufficient amount accessible online to facilitate trading services and fast transfers for their users.

The DIFX Exchange stores its users’ funds in a secure custodian wallet provided by Fireblocks, one of the most reputable digital asset custodians in the world.

Fireblocks combines security techniques like hardware isolation with a cryptography technique called Multi-party Computation (MPC) to store digital assets in a robust and secure manner.