Crypto Wallet 101

I. What is a crypto wallet?

Physical wallets we use in our everyday life function as containers for cash. In comparison, crypto wallets are not containers for digital money; instead, they are a tool to achieve basic financial functions, including the storage and management of private keys, creation of wallet addresses, transfer of cryptocurrencies, and queries of the transaction history of each wallet address.

A wallet app creates one or multiple wallet addresses following cryptographical principles, with each wallet address corresponding to one key pair: a private key and a public key. A public key is generated through mathematical calculations based on the private key, and for each private key, there is a corresponding public key. The public key is mainly used for external transactions, where the private key is needed for signature in each transaction to prove the control over the assets in the corresponding wallet address.

To present it in a more intuitive way, let's compare a crypto wallet to a bank card:

Wallet address = bank card number

Wallet password = password for your bank card

Wallet private key = bank card number + password

Wallet mnemonic = bank card number + password

Keystore + wallet password = bank card number + password

Keystore ≠ bank card number

Note: You can recover the assets in your wallet with either the private key, the mnemonic, or Keystore alone.

II. Types of crypto wallets

Based on the platform they are operated on, cryptocurrency wallets are divided into desktop wallets, mobile wallets, web wallets, hardware wallets, and paper wallets.

Desktop wallet: A desktop wallet, also known as a software wallet, runs on a desktop operating system such as Windows, Mac OS, or Linus;

Mobile wallet: A mobile wallet runs on a mobile operating system like iOS or Android for greater convenience for users;

Web wallet: A web wallet is stored on a third-party server and users can access the wallet via browsers;

Hardware wallet: A hardware wallet is a crypto wallet that stores the user's private key in a secure hardware device and can be connected to the computer or the smartphone through a USB port;

Paper wallet: A paper wallet stores public and private keys on a piece of paper.

Depending on internet connectivity, crypto wallets are divided into hot wallets and cold wallets.

Cold wallet: Cold wallets are offline and inaccessible via the Internet. Examples include paper wallets, hardware wallets, and offline computers or smartphones. Cold wallets are immune to hacking and can safeguard the assets stored. Although it is the safest method to store digital currencies, cold wallets require extra steps for creation and transactions. Any damage to the hardware or missing private keys may result in asset losses.

Hot wallet: Hot wallets are wallets that are connected to the Internet, including online desktop wallets, mobile wallets, and web wallets. Hot wallets store the encrypted private keys on the server and download and decrypt them when needed; While easy to use, hot wallets are highly vulnerable to hackers' attempts to steal wallet information such as private keys.

Crypto wallets can also be divided into centralized wallets and decentralized wallets based on where users' private keys are stored.

Centralized wallet: The private keys of centralized wallets are not owned by users. Centralized wallets are also referred to as off-chain wallets. The wallet controls users' private keys and funds. If you create an account on a website, which enables a wallet for you but does not give you the private key, then this wallet is a centralized one. Users may suffer unnecessary losses when their centralized wallets are compromised by hackers.

Decentralized wallets: The user manages the private key, and the assets are stored on the blockchain. Decentralized wallets are usually referred to as on-chain wallets. If the private key is lost, the wallet will not be able to help the user recover it, meaning that the funds will be lost forever. That being said, decentralized wallets are more immune to hacking incidents, and users needn't worry about inside jobs by wallet service providers.

Also, there are watch-only wallets. Users may import the corresponding watch-only address of a wallet to browse information on this address. However, it should be noted that users are only allowed to browse information and not to make changes with this wallet.

III. 10 don'ts when using crypto wallets

1. Don't use wallets that are not backed up;
2. Don't share or store your private key via emails;
3. Don't store your private key with messaging apps or cloud services;
4. Don't take screenshots or photos of your private key;
5. Don't share your private key using messaging apps;
6. Don't disclose your private key to people around you;
7. Don't share your private key in group chats;
8. Don't use wallet apps provided by unknown third parties;
9. Don't use Apple IDs provided by others;
10. Don't import your private key to unknown third-party websites.