So, you want to buy some cryptocurrency. Or perhaps you want to store your already purchased crypto somewhere secure. Maybe you want to get involved in decentralized finance (DeFi). In order to do so you will want, or need, to use a wallet. But what is a wallet exactly? And what kind of wallet is right for you?
First, let’s recall that any cryptocurrency you own is stored on the blockchain itself. When you purchase it, or someone sends it to you, the tokens are sent to your unique public key for the protocol associated with the token. This public key is usually called an address. The public key has a related private key that functions like a password so you can interact with your crypto.
A cryptocurrency wallet stores your public and/or private keys and provides digital signatures to authorize transactions. In addition to sending, receiving, and spending cryptocurrency with a wallet, you can also use it to interact with decentralized applications and smart contracts. These latter types of interactions are particularly important for participation in DeFi. Some wallets also allow you to purchase tokens directly from their interface.
There is an expression in crypto - “Not your keys, not your coins.” Your keys are your access to your crypto; without them you have nothing. As such, storing and managing these keys in a secure manner is paramount. But, if you want to interact with your crypto regularly, you will also want an easy and efficient way to do so. Knowing the appropriate balance between security and ease-of-use for your needs can guide you to the most appropriate storage solution for your keys. In most cases it will be some type of wallet.
No matter the wallet type, you use it to keep your keys safe. Although most allow password access, a seed recovery phrase, provided when you initially set up your wallet, is often the only way to get back into your wallet if you forget your password or the hardware or computer where you store your keys is not accessible. It is of the utmost importance to keep a record of your recovery phrase somewhere safe but convenient.
A seed recovery phrase takes the form of 12 to 24 words in a specific order. It is randomly generated and unique to your wallet. If your seed phrase is lost, and something happens to your wallet or you forget your password, you can never recover your keys and, therefore, can never access your tokens again.
Wallets come in one of three main formats: paper, hardware, or software.
|Paper||Keys written, or printed as QR codes, on paper||▪ Difficult to hack||▪ Can not perform partial transactions ▪ Can’t be reused ▪ Easily lost or destroyed|
|Hardware||Keys stored on small hardware device and kept offline||▪ Difficult to hack ▪ More secure/hack resistant||▪ Expensive ▪ Difficult for beginners to use ▪ Easily lost or destroyed|
|Software/online||Keys stored online with a web or mobile app to interact with the chain||▪ Free ▪ Keys quickly accessible for use in transactions||▪ Less secure ▪ Must trust that software creator will be around long-term|
Wallets are generally categorized as either hot or cold.
As mentioned earlier, your crypto is stored on chain; every different token you own is on the associated blockchain. Accessing each currency requires a different set of keys. A wallet can store your keys for as many protocols as the wallet supports; within a single wallet you can have a portfolio of your tokens (sometimes also called “wallets”) with their associated keys.
Many people use multiple wallets to participate in the crypto ecosystem. If you own a wide variety of tokens, you may need to find the wallets that support each protocol with which you wish to interact. Even if a single wallet could store all of your keys adequately, you may decide to maintain an online wallet with a small pool of tokens for frequent transactions and a hardware wallet for long term storage.
If you decide to get involved with DeFi, you may decide to set up separate wallets for different ''accounts'' in order to manage and track your participation. Wallets are central to participation in DeFi because they serve as the mechanism by which you agree to permission on dapps, sign transactions, pay gas, speed up transactions, and more. In addition, your keys, and therefore your wallet, serve as identity management for your participation in DeFi. If you are signed in to your wallet, you can quickly access any dapp without having to create a new username and password.
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Bison Trails is a blockchain infrastructure platform-as-a-service (PaaS) company based in New York City. We built a platform for anyone who wants to participate in 25 new chains effortlessly.
We also make it easy for anyone building Web 3.0 applications to connect to blockchain data from 33 protocols with Query & Transact (QT). Our goal is for the entire blockchain ecosystem to flourish by providing robust infrastructure for the pioneers of tomorrow.
In January, 2021, we announced Bison Trails joined Coinbase to accelerate our mission to provide easy-to-use blockchain infrastructure, now as a standalone product line. The Bison Trails platform will continue to support our customers. With Coinbase’s backing, we will enhance our infrastructure platform and make it even easier to participate in decentralized networks and build applications that connect to blockchain data.