Cryptocurrency Wallets: What Are They?
The digital wallet or wallet is a software tool through which you will have the possibility to have full control of your cryptocurrencies.
These coins are produced with blockchain technology and are stored within it, which behaves like a large accounting book distributed among the nodes belonging to the network.
Through the wallet you can manage them and make or receive transactions, as well as always keep them under control.
We can identify three types of wallets:
- Hardware wallet (physical medium);
- Paper wallet (paper wallet in which the private and public keys are printed);
- Software wallet (apps downloadable on electronic devices).
Each wallet has the function of signing and validating cryptocurrency transactions through the use of a public key and a private key.
What are the public key and the private key?
Public keys refer to a series of alphanumeric characters, which perform a function similar to the current account number, the so-called IBAN.
This is generally shared with third parties to receive cryptocurrency transactions. This is done without compromising the security of the Wallet. This series will have a specific initial letter that identifies the type of cryptocurrency used. Therefore, it varies according to the reference cryptocurrency, for example, for Biticoins it is B (the latter applies to the Bitcoin update called SegWit).
While private keys, on the other hand, must necessarily be “secret” and, therefore, must not be disclosed to third parties. Through your private key you can access the cryptocurrency that is in the blockchain. This explains why they should not be disclosed to other parties, as they would then have access to the cryptocurrencies in your Wallet.
The Function Of Wallets
In general, beyond the specific type of wallet, these allow you to send and receive money in cryptocurrencies and guarantee the user’s anonymity.
Software Wallets identify themselves as simpler and more user-friendly tools through which you can manage your cryptocurrencies. Surely it could be very useful to set a password for opening the software.
In fact, Hardware Wallets and Paper Wallets are bound to the management of physical media, which must necessarily be kept as precious objects and require greater experience and attention to the management, custody and use of private keys.
On the contrary, a Wallet software can be conveniently managed through a smartphone / desktop app or through a web app. The wallet software is a safe, fast and effective tool.
The difference between a Software Wallet and an Exchange
The Software Wallet is a digital wallet through which you can manage your cryptocurrencies. This, based on the type of service offered, can be used both online and offline, avoiding the vulnerability of web browsing.
The Exchange integrates a custody service via Software Wallet, through which you can manage your cryptocurrencies through the platform and exchange them with other users.
The Exchange does not give users the possibility to keep and know their private keys, therefore, unlike a Wallet, users do not have full control over their cryptocurrencies, as each transaction must be approved by the company providing the service. Exchange (these services are called Custodial, as they keep your private keys).
Conversely, a Non-Custodial Wallet guarantees full sovereignty over one’s finances. The Exchange services can only be used via the Internet and require their users sensitive data to access the service (residential address, tax and personal information, telephone number, email).
Basically, the Non-Custodial Wallet has no intermediaries and guarantees user privacy as it does not require sensitive data and is Permission-Less (you do not need to ask for permission from third-party companies to carry out transactions).
The Custodial Wallet has an intermediary (i.e. Exchange), which is in charge of managing the cryptocurrencies on behalf of the users, who, not feeling able to manage the security of their keys, rely on third parties, however, renouncing the full sovereignty of the own funds, since when depositing on these platforms you must comply with the terms and conditions of use of the services (which in certain cases may take the trouble to block users’ funds to carry out certain checks).
A final difference between a non-custodial wallet and a custodial one is trust: while with a non-custodial wallet you don’t have to trust any intermediary, with a custodial wallet you are placing your trust in a third company, which could fail or suffer. hacker attacks resulting in loss of funds.