Cryptocurrencies like Bitcoin and Ethereum are becoming increasingly famous due to their many improvements over traditional fiat currencies. If you want to use any blockchain-based cryptocurrencies, you will need to understand how blockchain wallets work.
The article explains what is blockchain wallet, gives a demonstration as to why you might use a blockchain wallet and describes the various types of blockchain wallets. It also includes a demo on the usage of blockchain wallets.
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Why Use a Blockchain Wallet?
Traditional banking systems pose different problems for doing any transaction. For one thing, transactions are often very slow. For another, any transaction has to pass through an intermediary, such as a bank, meaning there is a central point of failure. And there are issues in keeping a record of all accounts and balances; data can get jeopardized, manipulated, or even corrupted across various systems where the accounts and balances are maintained. Blockchain wallets shorten or eliminate these problems.
What is a Blockchain Wallet?
A blockchain wallet is a cryptocurrency wallet that grants users to manage different kinds of cryptocurrencies—for example, Bitcoin or Ethereum. A blockchain wallet helps anyone exchange funds easily. Transactions are safe and secure, as they are cryptographically signed. The wallet is accessible from different web devices, including mobile ones, and the privacy and identity of the user are maintained. So a blockchain wallet provides all the characteristics that are necessary for safe and secure transfers and exchanges of funds between different parties.
It is very similar to the procedure of sending or receiving money through PayPal or any other gateway used today, infect you use cryptocurrency instead. Examples of blockchain wallets include Electrum, Blockchain.info, Jaxx, Mycelium, Samurai, and Bitcoin paper wallets, etc. There are many more based on the needs you have and the security you required.
How Do Blockchain Wallets Work?
First, let’s discuss what private and public keys are and how these keys are associated with a blockchain wallet. Whenever you create a blockchain wallet, you are provided a private and public key linked with your wallet. Let’s use email as an example for this article. If you want to receive an email from someone, then you give him or her your email address.
But giving out your email address doesn’t mean someone will be enabled to send out emails via your account. Someone would have to know about your email account’s password to do that. Blockchain wallets follow the same process using a public and private key together. A public key is the same as your email address; you can give it to anyone. When your wallet is generated, a public key is generated, and you can send the public key to anyone in order to receive funds.
The private key is highly secret. It’s similar to your password; it should not get hacked and you should not share it with anyone. You use this private key to allocate your funds. If someone gets access to your private key, there is a high possibility that your account is negotiated, and you might end up losing all the cryptocurrency deposits in your account.
Blockchain Wallet Features
Now that you know how Blockchain wallets work, it is immediate that you should know about their features. Here are some of the main features of Blockchain wallets:
- Easy to use. It’s just like any other software or wallet that you prefer to use for your day-to-day transactions.
- Highly secure. It is just a matter of highly securing your private key.
- Allows quick transactions across geographies. And these are barrier-free, without intermediaries and third parties.
- Low transaction fees. The cost of transferring funds is much less than with traditional banks.
- Allows transactions across various cryptocurrencies. This helps you to do easy currency conversions.
There are two types of blockchain wallets based on private keys: hot wallets as well as cold wallets. Hot wallets are like normal wallets that we used for day-to-day transactions, and these wallets are user-friendly. Cold wallets are similar to a vault; they store cryptocurrencies with a high level of safety and security.
Hot Wallets and Cold Wallets
Hot wallets are online wallets through which cryptocurrencies can be transferred instantly. They are available on the online platform. Examples are Coinbase and Blockchain.info. etc., Cold wallets are digital offline wallets where the transactions are registered offline and then disclosed online. They are not maintained in the cloud on the internet; they are assisted offline to have high security. Examples of cold wallets are Trezor and Ledger as well.
With hot wallets, private keys are saved in the cloud for faster transfer. With cold wallets, private keys are stored in different hardware that is not connected to the internet or the cloud, or they are stored on a paper document. Hot wallets are simple to access online 24/7 and can be accessed via a desktop or mobile device, but there is the risk of inconceivable theft if hacked. With cold wallets, the way of the transaction helps in protecting the wallet from unauthorized access (hacking and another online susceptibility).
We can further divide wallets into three types:
- Software wallets;
- Hardware wallets, which you connect to your USB drive; and
- Typical paper-based wallets, for which you print your public key and private key on a fragment of paper and keep it in a secure place.
A software wallet is an application that is downloaded on a device; it could be a desktop computer or a mobile device, or it could be a web-based wallet that can be accessed online platform. Breadwallet, Jaxx, and Copay are popular examples of software wallets. We can further classify software wallets as desktop wallets, online wallets (web wallets), and mobile wallets as well.
· Desktop Wallets
Desktop wallets are cold wallets in which the private keys are reserved in cold servers (on your desktop). You can unplug the wallet from the Internet, and then do some offline transactions, and then bring it back online. In case the main server is lost, then a cold server, basically a desktop, is used as a backup server.
These wallets can be downloaded on any computer but can be accessible only from the system they are installed on, so you make sure that the desktop or the machine on which you are downloading the desktop wallet is safe and secure (has a backup and is in a secure location), and that you’re maintaining the hardware and not compassionate the machine go anywhere.
These wallets are definitely economical. Electrum is one of the most famous desktop wallets.
· Online Wallets
These are another type of hot wallet that run on the Internet. Users have the benefit of accessing these wallets over any device. It could be a tablet or a desktop, and you can access it from your mobile browser. The private keys are saved online and are controlled by a third party. For example, GreenAddress is a Bitcoin wallet that is available on the web, has an Android application, is available on a desktop, and also is available on iOS.
· Mobile Wallets
Mobile wallets are similar to online wallets excluding that they are built only for mobile phone use and accessibility. These wallets have a user-friendly interface and help you do transactions easily. Mycelium is the finest available mobile wallet.
A hardware wallet is a kind of cold storage device, typically like a USB, that stores the user’s private key in a safe and protected hardware device. These wallets are the same as portable devices that can be connected to the computer (plugged in). As noted earlier, they are less prone to malicious attacks and are hacked-proof. Ledger, Trezor, and KeepKey are the best hardware wallets on the market.
To make a transaction from your hardware wallet, you have to make sure that the hardware wallet is plugged into your computer system.
A paper wallet is an offline procedure for storing cryptocurrencies. This wallet is a printed paper book that has both your private key and public key, which are accessed using a QR code. Since these wallets are safe, they are widely used for storing huge amounts of cryptocurrencies. Bitcoin Paper Wallet and MyEtherWallet are two widely used paper wallets in the world.
A paper wallet works with your software wallet to send funds from your software wallet to the public address shown on your paper wallet. First, you park your funds in a software wallet, then you transfer the funds from your software wallet to the public ZIP code printed on the paper wallet.
Blockchain Wallets Comparison
Blockchain.info is a cryptocurrency wallet that supports both cryptocurrencies Bitcoin and Ethereum. It is easy to use and has a low-cost transaction fee. It has an exposed API, so you can easily make your own usable custom wallets.
Ledger Nano S is a hardware wallet that offers high safety and security for your account. It is available for various Bitcoin, Ethereum, and Litecoin. It is also possible to maintain multiple accounts and access them anytime anywhere.
Bitcoin paper wallet helps you to letter your own tamper-resistant Bitcoin wallet. It reduces the threat of hacking.
Jaxx enables a user to exchange currencies within the blockchain wallet. It is available for Bitcoin, Ethereum, Litecoin, and many more cryptocurrencies. With Jaxx, a user can view his or her updated balance as soon as the procedure is complete.