What is a Crypto Wallet?
Overview
A crypto wallet is a tool that allows users to easily interact with blockchain-based applications. Interestingly, crypto wallets don’t actually store crypto, but rather the “private keys” required to approve crypto transactions on a blockchain. Crypto always remains on a blockchain regardless of who owns it or how it is used, and crypto wallets serve as an interface to let a user interact with the crypto associated with his/her “wallet address.”
Anyone with an internet connection has the ability to create a crypto wallet with no personal information or payment required.
What is a Wallet Address?
Websites typically require a profile in order for a user to be able to access all of their services. Usually a user must provide a public username or email address and create a private password. The profile is generally used to keep track of a user’s activity and make things like checkout processes easier.
Wallet addresses can be thought of as crypto users’ public profiles. Unlike traditional public profiles, wallet addresses are not created by the user but rather generated and assigned to the user during the wallet creation process. Wallet addresses are publicly visible on a blockchain, and the blockchain keeps a record of the activity associated with each wallet address. While traditional digital profiles usually can only be used on an individual website, a single wallet address can be used to interact with all of a blockchain’s applications - and often all applications on many different blockchains. This is incredibly convenient for users who can securely use one wallet address for all of their online activities.
What are Private Keys?
Imagine you have an impenetrable safe that you store all of your valuables in. The safe has a built-in lock that can never be replaced, and can only be opened by a single key. In order to protect your valuables, you make a few copies of the key and hide them somewhere only you know about. If someone else obtains a copy of the key to the safe, they have the ability to take all of the valuables stored in the safe. If you lose the keys to the safe, you lose all of the valuables stored in the safe since it is impossible to break into.
Now imagine that same safe exists in a digital format, and holds crypto assets. Private keys are simply a form of keys that are needed by crypto users to interact with the assets associated with their wallet addresses. Private keys are generated during the wallet creation process and can never be changed, meaning anyone who has access to the private keys associated with a wallet address has the ability to use the wallet address’ crypto assets. If private keys are lost they cannot be recovered.
Types of Crypto Wallets
Hot Wallets
Examples include Keplr, Metamask, & Coinbase Wallet
A “hot wallet” is a form of crypto wallet that stores a crypto user’s private keys online. Hot wallets are commonly used in the form of a browser extension or mobile application.
Pros:
- Free to set up;
- Easy to use;
- Most convenient option.
Cons:
- Less secure than hardware wallets since private keys are stored online.
Hardware Wallets
Examples include Ledger & Trezor
A “hardware wallet” (also known as a “cold wallet”) is a piece of hardware that stores a crypto user’s private keys offline. Hardware wallets are often similar to flash drives in appearance, and require users to approve each crypto transaction on the actual device.
Pros:
- Hardware wallets are generally considered the most secure way to store private keys.
Cons:
- Hardware wallets can be expensive;
- Hardware wallets are less convenient for users since all transactions must be approved on the device.
Recommendations
It is recommended that all Umee users use hardware wallets in order to protect their assets. Interchain wallets like Keplr allow users to connect their hardware wallets so they can enjoy the same user interface with enhanced security. Users seeking convenience are advised to store the majority of their crypto assets in a hardware wallet, and transfer small amounts of crypto to a hot wallet when desired.
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