Any action with cryptocurrency begins and ends with a cryptocurrency wallet. There is a lot of information about what it is, why it is needed, and for what purpose. Many people have different ideas about what it is and why it is needed. But essentially, all definitions and ideas boil down to one and are used in the same way. To begin with, let’s try to give a simple definition of what a cryptocurrency wallet is.
A cryptocurrency wallet is a program that allows you to receive and send cryptocurrency from a similar other cryptocurrency wallet.
For each type of cryptocurrency, there are separate crypto wallets. For example: for the Bitcoin cryptocurrency, there must be a Bitcoin wallet. For Ethereum – a wallet for ether, etc. Today, multi-currency wallets have long been practiced. The principle of their operation is the same, but with one significant difference, they are able to send and receive not one, but several currencies.
What is a Bitcoin wallet?
Without going into details, it is a tool to gain access to the blockchain network. Bitcoin wallets come in several types: software, hardware, and paper. Depending on their operating mechanism, they are divided into cold and hot wallets.
Software-based wallets are more user-friendly than hardware wallets but less secure. Hardware and paper wallets, or offline wallets, are currently the safest types, but they are considered outdated and unreliable.
How do cryptocurrency wallets work?
It would be a misconception to believe that cryptocurrency wallets directly store cryptocurrency. In fact, they only provide access to interact with the blockchain.
Each cryptocurrency wallet has its own public address, consisting of a set of letters and numbers as an identifier.Users can share their public address to receive coins, but in no case should anyone show their private key to anyone.Having a private key (in other words, a SID phrase) makes it possible to gain access to your money, even if your device has been compromised.
Any Bitcoin wallet that you register online, such as an account on an exchange, is considered hot. Hot storage implies quick access to funds and is therefore most convenient for traders and those who frequently use their digital assets.
Cold wallets are used by exchanges for long-term storage of their clients’ funds, as well as by investors who are called “hodlers”. A physical key carrier that works without an Internet connection is more resistant to hacking, and therefore more secure.
The most common type of hot wallet is a browser-based bitcoin wallet, it is very easy to create one. In this case, a browser is enough to access the registry; you do not need to download and install third-party software. Wallets on exchanges also fall into this category. It should be remembered that you trust the funds to the other party, so this option is not a standard of security. Often, the developers of a particular coin release their own bitcoin wallet, for example, the litecoin wallet can be downloaded from the official website.
Desktop wallets are installed on the user’s computer. When creating a wallet, a file containing information about the wallet will be saved on the device, and it must be securely encrypted with a password. It is important not to forget this password and not to lose the file, so as not to lose access to your funds. To do this, a backup is made. Also, make sure that your computer is free of viruses or malware.
Mobile wallets have been developed for smartphones that allow you to send bitcoins using a QR code.In this case, you also need to take care of the security of your private keys and encrypt your wallet. To create a bitcoin wallet, you need to download the application to your phone, come up with a complex password combination and save your SID phrase. Sometimes a Touch ID is enough to open a Bitcoin wallet.
The function of hardware wallets is to store randomly generated private keys on the device to access the blockchain.Despite the high level of security of this type of wallet, there is still a risk of embedded software failure. Modern devices offer additional capital protection against loss by installing a SID phrase.
The bitcoin paper wallet stores information about the public address and private key in the form of a QR code, which is printed on paper. But the disadvantage is the ability to send from the wallet only the entire available balance in its entirety, and not a partial amount.
Legacy and SegWit
The bitcoin wallet address, roughly speaking, is the number of your cryptocurrency account and is used to receive and send bitcoins. Bitcoin wallet addresses have some differences, namely the first digits of the number: some begin with “1”, others with “3”, and some even with “bc1”. A few years ago, there was no such diversity, because everyone used the same address format – Legacy. Now, not only the first digits differ, but also the methods of processing transactions.
Legacy format is used by most cryptocurrency service providers and is identified by the number “1”.Although these addresses are used quite often, they are inconvenient in the form of case sensitivity when recording, and they also place few transactions in the block and miners use such addresses much less. By the way, Legacy eliminated the use of visually similar signs that can mislead users, for example, the letters “o” and zero “0”.
After the Bitcoin soft fork in 2016, the Segregated Witness protocol was activated, which allowed to reduce the weight of transactions in blocks and increase the throughput of transactions. SegWit made it possible to significantly reduce transaction fees.All SegWit addresses start with bc1 and are case insensitive, i.e. eliminate a lot of errors. Among the disadvantages, it can be noted that not all cryptocurrency servers and exchanges support the new protocol, but for this case, you can use an intermediate address. Crypto wallets such as Trezor, Electrum and Ledger Nano S support the SegWit protocol.
Depending on the needs, each type of cryptocurrency wallet is versatile and indispensable for specific needs and cryptocurrency operations. Storage, payment, trading, or investment involves a specific type of wallet and security protocol. If you need to create a cryptocurrency wallet, feel free to contact us; we will help you take the first step into the world of cryptocurrencies.