Are you simply investing in crypto not knowing what are wallets? How do they work? Why do you even need a wallet? We'll answer all your questions in this super easy visual article. By the end of this article, you'll be a crypto wallet genius.

Let's go!

What are Wallets?

A wallet is a gateway to your account on the blockchain. Think of it as an online banking app without a bank. That means you are the sole owner and custodian of your funds. A wallet is simply a tool to help you achieve that.

The above illustration shows how a wallet app gives you direct access to your account on chain. It is important to note the difference between a wallet and your account. A wallet helps us create and manage an account on the blockchain.

How does it work?

You install a wallet just like any other software or app. Although, you must understand few terminologies to be safe and secure in the Web3 world.

Seed Phrase

I swear when I first saw a seed phrase I was like, WTH! That doesn't even make sense. It turns out a seed phrase is the master key to your account. Many would like to call it a secret recovery phrase.

It is usually a combination of 12 random words. Pen them down on paper and keep it at the safest place you know. In case you get disconnected from wallet or, maybe you wish to access the same account on other devices - your seed phrase is all you need. This may sound smooth and yet it is risky. You forget your seed phrase, you lose your assets. In contrast to Google or Facebook accounts, there is no centralized party here to help you recover your account. Nobody will ask you for KYC in truly decentralized apps. No phones or email ids are linked. Keeping yourself anonymous comes at a cost and you've got to be super responsible here.

Speaking from a cryptographic perspective, a seed phrase generates the private key to your account. What the heck is a private key you ask? Let's see.

Key Pair

When you create an account on a blockchain, a key pair is generated. A public key and a private key. Think of the public key as your Paypal ID. Public key is the ID where your friends will send you crypto money. While the private key is like your password. It is meant to be kept hidden. The private key is proof that you are the sole owner of this account. The purpose of both keys is to maintain asymmetric encryption. Interestingly, both of the keys look different but the public key itself is generated from the private key. It makes both of them a unique key pair.

Want to learn more about asymmetric encryption in blockchain, check out this article.

Cryptographic algorithm on seed phrase derives the private key which thereby generates the public key.

Let me make this super easy for you. What do you think happens behind the scenes when somebody sends you a cryptocurrency? Check out the role of key-pair in this sweetest illustration out there.

If you've never installed a crypto wallet in your life. Go ahead, try any of these - Metamask, Rainbow, Trust on Ethereum or Phantom on Solana blockchain. They are all free to install. Get to know wallets before you add any funds.

Things you can do with wallets!

• Check your balance - Dashboard to all your crypto assets and previous transactions.
• Send/Receive payment - Transfer crypto money to your family, friends and business partners. All you need is their account address - the public key. Remember, the decentralized web is a pretty open playground. There are no regulations to whom you transfer, where you transfer and what amount you transfer.
• Connect to dapps - You can access decentralized apps through wallets, this is the only login id you’ll ever need I swear. It feels like magic! Whether you're on an NFT Marketplace like OpenSea or swapping tokens on Uniswap, your wallet acts as provider of login credentials.

There are a plethora of other inbuilt features like swapping tokens, storing assets - NFTs, staking cryptocurrencies and more. It depends on the wallet you are using.

Types of wallets!

📱 Soft or Hot Wallets

These wallets can be apps on a smartphone, a desktop app or simply a Chrome extension. We call them ‘hot’ in the sense that they’re always connected to the internet. They are easy and fast to use but not the most secure way to keep your assets safe. Wallets like Trust, Metamask, Rainbow are hot wallets.

Note that not all wallets give you full ownership of your funds. We call them custodial wallets. If you're investing in cryptocurrencies, you're probably using a custodial wallet. Coinbase wallet is a custodial one. You essentially give Coinbase the right to hold custody of your funds. Unlike power users, most people prefer using custodial wallets. Why is that? Simply because not everyone wants to bear the burden of remembering a seed phrase. It's convenient to just trust a third party. Remember, Stefan Thomas, who forgot his private keys and couldn't recover his Bitcoin account.

🔌 Hard or Cold Wallets

Blockchain is super secure but you can’t say the same for the PC connected to the internet. What if your computer gets infected with malware that could potentially steal all your crypto?

Photo by olieman.eth on Unsplash

Enters Cold wallets. These are hardware wallets designed to keep your funds safe outside the connected world. Think of them as safe flash drives solely built to store crypto assets. They keep your private keys safe and don't expose them for online attacks. For example, Ledger and Trezor are popular options out there.

How to keep yourself secure!

At the end of the day, if you're using a non-custodial wallet, your funds are yours alone to keep safe. No other party is going to take responsibility. Let's see what all we can do:

✅ Use only authentic wallets. Verify from the official site and community.

✅ Write down the seed phrase and keep it safe offline. Do not store it on your PC or smartphone!

✅ Nobody will ever ask for your private key. Never ever share it with anyone. Developers can accidentally push the key on Github. Make sure you hide it well.

✅ A transaction once made cannot be reverted. Keep your eyes and brain open.

✅ Don’t ever connect your wallet to doubtful sites/apps. You’ll get scammed. Ideally, you should disconnect your wallet from the app once you’re done.

✅ Going beyond micro-investment, you might wanna be extra careful. Hardware wallets provide better security for large funds. Buy them only from official sites.

✅ Set multiple layers of authorization via multi-signature wallets.

✅ Use wallets that allow withdrawal limits. In case of an unfortunate event, not all your money would compromise in a single transaction.

✅ Keep yourself updated! Join communities, social handles and Reddit subs. You'll come across news and stories that'll help you make more informed decisions.

Honestly, keeping yourself secure in the crypto sphere needs a whole new article. I hope the above pointers gave you some idea of TO-DOs and NOT-TO-DOs.

🙏 Conclusion

Whoa! We did it. You just graduated from Wallets 101. Show some love and do share your thoughts in comments down below.

I'm actively learning Blockchain technology and writing content to make it accessible for people. Feel free to HMU on Twitter. 🤗

Tada! 👋