All You Need to Know About Crypto Wallets

DateMarch 25, 2022
Reading Time1 h 9 min
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Mathieu Hardy

Chief Development Officer

There are many different types of crypto wallets, each offers something a little different. Read to find out which is the best option for you.
Introduction

While cryptos may be entirely digital, there is still an important need to prove they are yours. That's done in a unique way involving private keys. To handle that private key, Crypto users use what is known as a crypto wallet to secure, store, trade from and carry their cryptocurrencies around with them - all powered by private and public keys, through cryptography.


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Private-Key Cryptography predates crypto assets and we will let you read all about it on Wikipedia if you want to know more. If you don't, just know it's a battle-tested method of proving something is yours and yours only.

There are many different types of crypto wallets, each offering something a little different to the others in terms of security, usability, privacy, and features. It is, for this reason, important to understand the basics of crypto wallets, as well as the differences to decide which is the best option for you.

Crypto wallets become your gateway to the digital assets on a specific blockchain and they allow you to view, interact and sign in several ways. Depending on your cryptocurrency wallet of choice, you will have different levels of security and functionality - and this all begins with deciding if you want to use custodial, or non-custodial wallets.

From there, wallets can come in all forms; from slips of paper to hardware devices that look like flash drives. Some cryptocurrency wallets are entirely digital and are attached to exchanges and other services making for more seamless uses, while other wallets provide one use, but do so very well.

But how does your cryptocurrency wallet work exactly? Let's take a quick look at that.

Private Key Cryptography

How do Crypto wallets work? Private keys explained.

On a broad level, your cryptocurrencies are yours because you hold the private key that allows for your digital currency to be transferred. The private key, used to sign, needs to be kept super secure, or anyone could just spend all your money. That's what the wallet is for: storing the user's private keys.

In actuality, your wallet does not store cryptocurrency. Your digital assets are stored on the Blockchain and signed by your private key letting the entire network know that your wallet - and by extension, you - own the specified coins. This private key is what gives you the authority to move or transfer coins to other wallets and addresses.

Public and private keys

When a person sends you cryptocurrency, they are essentially signing off ownership of the coins to your wallet's address - this address that receives transactions is known as a public key and is similar to a bank account number.

A crypto wallet consists of two matching key pairs: private and public keys. To be able to access coins that are sent to your public key - often referred to as a "crypto wallet" - the private key must match the public key.

What does it mean in practice?

So if Alfred wants to send Bethany some Bitcoin, he goes into his wallet and uses his private key to sign a transaction that has, as the destination, Bethany's public key. And what he wanted to sign is now assigned over to Bethany. As long as she has her private key, she will then be able to transfer those further.

When someone sends you crypto, there is no actual exchange of coins, the cryptocurrency transaction is made as a change in the ongoing, distributed blockchain's "big accounting book" of who owns what, just like when you do bank transfers it's not cash moving around but just writing in the bank's big books.

Now that you understand the basics, know that there are a number of different wallets - places where you can keep your private key and from which you can sign transactions - that are available to users that all use the same encryption principles, but that offer different functionalities.

Wallets

Wallets

As explained, the term "wallet" denotes a potential for storage of digital tokens, but in reality, these wallets are portals to the cryptocurrency space. The only thing they hold are your own private keys.

There are a ton of different types of crypto wallets, separated into many different categories. Custodial and non custodial crypto wallets, hardware and software wallets, digital wallets, desktop wallets, web wallets, mobile wallets, and many, many more. Having so many to choose from may feel overwhelming. Let's take a look at different types of crypto wallets, as well as explain the differences between them.

Choosing the right wallet for you - Custodial vs. Non-Custodial

The first decision that needs to be made is whether or not you will use a custodial wallet, or a non-custodial one. As the name suggests, in a custodial wallet, someone else has the responsibility to hold your private keys on your behalf. In other words, you're trusting a third party to secure your funds and return them if you want to make crypto transactions or just send them somewhere else - much like having a bank account in a traditional bank.

These custodial wallets offer less personal responsibility, and rather ask for trust in the custodian that holds your funds.

With a non-custodial wallet, you have sole control of your private keys, which in turn control your cryptocurrency and prove the funds are yours. This means there is no need for a third-party trusted intermediary but it also means that you are solely responsible for not losing the keys to your own wallet and requires that you take precautions to protect your funds.

If you have a lot of funds and you are going to manage your private keys yourself, a good strategy would probably be to use more than one wallet. The same way you don't (or at least, shouldn't) keep all your cash in one place.

Types of Wallets

Different Types of Wallets

Within these two main categories of wallets; custodial and non-custodial, there are different types that offer a range of functionalities. When it comes to choosing the right wallet for you, there are none that are better than others. Which crypto wallet you decide to pick has much to do about personal preference.

Viewers

Viewers

A rather unique wallet style, to begin with, is Viewers. Viewer wallets are not technically a type of crypto wallet, but they are rather interfaces that you use to keep track and aware of your cryptocurrency funds.

These are not exactly wallets, per se, but rather a way to easily view your funds without having to use your private keys. These are particularly useful with cold storage, or offline wallets, allowing a user to view their digital currency without having to bring their private key online where it can be vulnerable to attacks.

However, these crypto wallets do not offer any more functionality than viewing as the signing of transactions is still done where the private keys are, some might however facilitate that signing.

Good examples are Zerion, deBank, or ApeBoard. OSOM also offers you to aggregate Bitcoin wallets, Ethereum wallets, and exchange accounts to view all your assets in one place.

Non-Custodial

Non-Custodial crypto wallets

Basic Cryptocurrency Wallet

The first wallet to look at is a basic non-custodial wallet. These wallets are ones where your private keys are handed to you either through web applications (such as on Metamask or My Ether Wallet) or on mobile applications, (such as on TrustWallet). Meaning in this group we have several types of wallets. Web wallets, desktop wallets, mobile wallets etc.

These non-custodial wallets maintain your funds "online", because the private key is on a device connected to the internet. These types of online wallets are called hot wallets.

They also leave you in full control, and responsibility of your keys and thus your funds.

Hot wallets have their advantages as well. Using a wallet like this offers good functionality and the ability to easily make cryptocurrency transactions as it is constantly online, but security is at risk as a malicious actor can find ways of getting your private keys and thus gain access to your funds. This is usually achieved through social engineering as opposed to actual "hacking". Indeed, most of those online wallets employ very good technology to keep your funds secure, but we, mere humans, are very subject to manipulation.

Sometimes it's a "very nice trick" and sometimes it's just because you downloaded the wrong app. But it has never yet been because someone brute-forced a private key to your wallet.

Smart Contract Wallet

Within the blockchain space, smart contracts have seen a huge growth in their possible use cases to a point where they can be used for wallet storage. A smart contract wallet is one where tokens are held on a smart contract controlled by a private-public key pair.

This offers some interesting functionality in that there is logic for recovery should you lose your private key and you can incorporate limits and different executionals - such as daily transaction limits, locking, and more while still remaining non-custodial.

Argent is one such popular smart contract wallet that allows for users to define one or more "Guardians" that can lock your wallet, approve a wallet recovery or approve a transfer that exceeds your daily limit.

These additional programmable functionalities allow for smart contract wallets to have a lot more possibility and to be very customisable, but it still allows for entire self-custody with no need to trust any other party, only the smart contract logic.

Cold wallets: Hardware wallets and Paper wallets

The biggest threat to any cryptocurrency is online malicious actors or hackers. While the likes of Bitcoin's blockchain cannot easily be hacked, nor the private-public key encryption, it is still possible to accidentally divulge your private key online to hackers.

This is where offline non-custodial wallets come in to prove the ultimate source of cybersecurity.

Hardware wallet

A hardware wallet is the most common form of offline non-custodial wallet and it is often a small physical device, like a flash drive, that can be plugged into a computer or can be kept air-gapped and interact with QR codes. Hardware wallets are also often called cold wallets, as they don't require to be connected to the internet at all times. Your cold storage goes online only during crypto transactions. This is why cold storage wallets are so effective against hacking.

Ledger is one of the most well-known hardware wallets on the market. Hardware wallets also allow for better functionality than a paper wallet (more on that soon), as the offline private key can interact online once plugged in.

Most hardware wallets have screens, which add another layer of security, as they can be used to verify and display important wallet details. For instance, a screen can generate a recovery phrase and confirm the amount and address of the payment you wish to make.

Paper wallet

A paper wallet is simply a piece of paper that contains a public address for receiving Bitcoin and a private key, which allows you to spend or transfer Bitcoin stored in that address. Paper wallets are often printed in the form of QR-codes so that you can quickly scan them and add the keys to a software wallet, or a wallet app, to make a transaction. The quality of the paper you print it on and how well you safeguard it is going to be very important, though, and since the advent of hardware wallets, few people recommend that solution.

Just like the hardware wallet, a paper wallet is also a type of a cold wallet. These wallets work entirely offline, but the concern with both a paper wallet and a hardware wallet is that they are physical, like any traditional wallet, and can be lost, damaged, or stolen.

An interesting next step in the evolution is the Ngrave Zero, which has a hardware wallet and a paper-like metal recovery plate to go with it. We can't wait for them to ship!

Custodial

Custodial - Delegate your Key Management

For many people, their gateway to crypto being a wallet means that their first wallet is often a custodial one. Custodial wallets offer a lot more convenience, more functionality and ease of use but do limit freedoms and control. There are two main types - Exchange wallets, and custodian wallets.

Exchange Wallets

It would be fair to say that the majority of cryptocurrency wallets are probably exchange-based ones. People flock to major exchanges to do their crypto business, and having an account directly linked to a crypto exchange means there is a seamless way to send, spend and transact coins while also storing them.

The likes of Coinbase and Binance however are hot pots for hackers and there have been some high-profile hacks where people have lost money by taking their coin on an exchange. More so, your money and your actions with crypto are subject to the exchange. If these services go down, which does happen, you won't have access to your wallet and your funds.

Custodian Wallets

That's like us: someone you trust to hold your keys but that is not a full-blown exchange with candlesticks.

At OSOM, your funds are held in a custodian wallet, however, there is an added advantage as while we hold these funds, they are also working for you and not simply being stored. If you put your fund into OSOM, and utilize the Crypto Autopilot, your portfolio is actively managed by an algorithm.

So, other than just storing your money, OSOM allows for your money to grow in value, it is integrated with other services like DeFi Earn, and typical exchange services. This is becoming a more popular way to utilize cryptocurrencies, especially with the emergence of DeFi and the taking of digital currency to earn yield.

Custodial wallets don't typically allow you to interact with the blockchain directly (outside of sending and receiving) so you couldn't use Aave on your own with your OSOM Ethereum wallet. But they do give you other services, such as, for us, DeFi Earn and Autopilot.

Summary of Pros and Cons

Summary of Pros and Cons

 Custodial Wallet    Non-Custodial Wallet 
Pros Cons Pros Cons
Easy to use You need to understand the custodian's security. Total control Full responsibility. You need to know what you're doing.
Different functionality Funds in custodian's possession. Ability to be offline Have a much steeper learning curve to know what you are doing.
Might be linked to exchanges Subject to custodians. No third parties
Additional services Bigger hacking target.

Less personal responsibility Will not allow you to interact with the blockchain in all the ways you might like.



Choosing a Wallet

Choosing a Wallet

When choosing a crypto wallet, there is no right or wrong answer - it is very much about personal preference and finding one that suits your needs. Many people who are coming to the crypto space will be drawn to custodial exchange-based wallets without even knowing it, but from there they may begin to branch out.

The new wave of DeFi and making money work for you has also seen people turn to wallets that provide additional services, such as OSOM's Autopilot to manage your investments on your behalf or DeFi Earn, where you can lend stablecoins for interest.

But one thing that needs to be mentioned is that you can -and probably should - have multiple wallets to suit all your needs. People may keep the bulk of their crypto off of the internet and will utilize a hardware wallet for ultimate security. Then, some may put some coins into Custodian Wallets where they can earn a passive income while also keeping funds in their hot wallets, or on an exchange for quick and easy transfers.

Conclusion

Conclusion

Finding the right crypto wallet is about finding your fit. It comes down to personal preference, but it can also be a balancing act between ease of use and security. Having all your coins on hardware wallets will greatly limit the risk of cyber attacks on your funds, but make it rather cumbersome to quickly and easily transact with them.

Storing your coins on an exchange may mean easy spending, but these coins are at risk of hacking and are not doing much simply being stored there. There are a number of services that store coins while making them work for you, and these are getting more and more popular and are certainly worth looking into.

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Mathieu Hardy

Chief Development Officer

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