Written By
Lindsay Presswell
Content Strategist

Wallet 101

January 25, 2022

The first step in almost everybody’s journey into web3 is to set up a cryptocurrency wallet and generate a public key with which you can store your investments. This article explains the most common wallet terminology, the distinctions between different types of wallets, and provides a starting point for how to begin to think about wallet security. 

What is a Wallet?

The term “wallet” is a bit of a misnomer, as no assets are actually stored in them–crypto assets are held on blockchains, of course. Instead, wallets are devices or services that enable users to access their public and private keys. These devices or services also allow users to connect to web3 dApps in order to purchase, sell, and trade assets.

There are 3 main components of a wallet: a public key, a private key, and a seed phrase. All three of these give different kinds of access to the assets that are associated with these keys. 

Public Key

A public key is a string of letters and numbers that act as a kind of blockchain “e-mail address.” Any individual or dApp who has your public key can send you assets through a transaction. It is generally safe to share your public key with trusted parties to allow you to receive transactions, although it should be noted that anyone who has your public key can see all of your assets and past and future transactions.

Private Key

When you generate a public key to set up a new wallet it will be accompanied by a second string of letters and numbers labelled as your wallet’s private key. The private key is what proves you are the owner of your wallet and thus the assets associated with your wallet. Private keys are cryptographically paired with their public keys so that owners can “unlock” (prove ownership of) their wallets.

You should never, under any circumstances share your private key with anyone. If a bad actor gets a hold of your private key, your wallet can be completely drained of its assets, and there is no way for you to retrieve them.

Seed Phrase

Most wallets also come with something called a seed phrase (also known as a “recovery phrase”) which is a randomly generated code made up of 12, 18, or 24 words, that can be used restore your wallet if you lose access to your wallet, or lose track of your private key.

Seed phrases can also be used to gain access to your wallet and drain your funds. It is not a good idea to store your seed phrase on your computer. Write your seed phrase clearly on a piece of paper and store it somewhere safe where you will not lose it.

Some people even choose to purchase special kits that allow them to engrave or stamp their seed phrases into a titanium card. This method is a more permanent and durable way to record your seed phrase; titanium is extremely fire resistant, and it is much harder to misplace or damage a metal card than a scrap of paper. 

Different Types of Wallets. 

The basic components of a wallet remain the same no matter what service you select to generate your public key, but there are a few different types of wallets that exist, and each provides different levels of security. 

Hot Wallet vs. Cold Wallet

A hot wallet is also known as a software wallet or an online wallet. Basically, it is a wallet that is connected to the Internet, and so the assets associated with a hot wallet are always accessible online. Metamask and Rainbow are two popular examples of hot wallets.

A cold wallet is also known as a hardware wallet. This type of wallet stores public and private keys on a piece of hardware that needs to be connected to your computer in order for the assets to be accessed. This type of wallet can be integrated with a hot wallet service, but the hardware device is always needed to execute a transaction on a cold wallet, adding an extra layer of security. Trezor and Ledger are examples of commonly used hardware wallets.

Custodial vs. Non-custodial Wallets

Finally, wallets can be custodial or non-custodial. A custodial wallet means that a third party has a record of a user’s private keys and thus access to the assets stored on that wallet. A web-based exchange like Coinbase is a common example of a service that provides custodial wallets.

A non-custodial wallet means that nobody but the owner has the private key and seed phrase, thus no one but the owner can access the assets associated with the wallet.

Wallet Security 

This article has given an overview of different wallet components and types of wallets, but you may still be wondering, which should I choose? Cold or hot? Custodial or non-? Like a lot of decisions in web3, choosing between wallet types comes down to striking a balance between security and convenience. 

A hot wallet enables you to execute transactions without having to connect a piece of hardware to your computer every time; but that extra piece of hardware adds a lot of security to your portfolio. If you’re new to web3, a custodial wallet may feel more like the web2 services that are familiar to you; but it is also empowering to go the non-custodial route and be the sole person in control of your finances. 

We cannot give you advice, but hopefully this article has at least gotten you thinking about some of the fundamentals that are at stake when it comes to managing your digital assets!

Track your balances across multiple wallets
Check out our bundled wallets feature.

Related Posts