Highlights:
- A crypto wallet is essentially an application that serves the purpose of a wallet for your cryptocurrency.
- When selecting a storage solution for your cryptocurrency, you should assess your risk tolerance, ambitions, and level of crypto understanding.
The one essential accessory that’s carried by everyone – no matter where they go – is a wallet. In today’s day and age, all personal information about payments and passwords et al, are saved in digital wallets. But when it comes to cryptocurrency, what does a wallet mean? In plain terms, it’s used as a gateway to a blockchain network. Essentially, cryptocurrencies are not saved in these wallets; they just interact with a blockchain.
This blog will explore crypto wallets, their function, and their significance in authentication. Let’s start with the basics first.
What Is a Crypto Wallet?
A crypto wallet is essentially an application that serves the purpose of a wallet for your cryptocurrency. It is termed a wallet because it is used in a manner comparable to that of a wallet, where one places cash or credit cards.
But unlike paper currencies that can be placed in a wallet or purse, with cryptocurrency, there’s no tangible currency. It exists on the blockchain. Moreover, it cannot be touched as there’s no physical manifestation. But just as a bank shows an account balance, people need to know how about the ownership of cryptocurrency assets.
This is where the crypto wallet pops in. It offers users a way to confirm account balances and offer visibility into the cryptocurrency owned by users. A cryptocurrency wallet also allows users to make cryptocurrency transactions. The approach is much like transactions that happen in a traditional bank account. A crypto wallet is a primary mechanism to manage cryptocurrency balances.
Why Do You Need Crypto Wallets?
Much like any given currency, cryptocurrency can be collected and used for various purposes and transactions. Just as a bank account forms the foundation for fiat currency, crypto wallets play a crucial role in ensuring the cryptocurrency is useful for individuals and organizations.
There are many uses of crypto wallets, and they help enable the practical utility of cryptocurrency. Some of the other reasons why crypto wallets are essential are:
- Cryptocurrency management: With crypto wallets, users can monitor the balance of cryptocurrency assets.
- Transactions: One of the primary reasons why crypto wallets are needed is because they facilitate sending and receiving cryptocurrency payments.
- Connection to decentralized apps: In a bid to connect and interact with Web 3.0 dApps, it’s essential to have a crypto wallet.
- Username identities: As mentioned earlier, cryptocurrencies are stored on a blockchain. A crypto wallet facilitates the completion of transactions with a username that can be linked with a public key address on a blockchain.
How To Use a Crypto Wallet
What do you own when you purchase a currency, say Bitcoin? You own two things: One, your wallet address, also known as the public key, and second a private key. The keys can be used to send or receive cryptocurrency while still warranting the encryption of your private key.
A public key is more or less like a bank account number. Here, the number can be shared with others to send or receive money from your account with authorization. Public keys are generally viewed as a wallet address — a hashed or compressed version of that public key. On the other hand, a private key is much like your bank account password or the PIN to your debit card.
But crypto, which is purely a digital currency, is not held directly into the wallet. Here, all crucial information – about your public and private keys that amount to your ownership stake of the crypto – is held within the wallet stores.
Encrypted cipher text can be created using the public key, and only a private key can decrypt it. The pair of keys can also be used to sign data, thus establishing the fact that the sender holds the private keys. While private keys allow for accessing confidential information, public keys facilitate its creation.
In the case of blockchain, anyone can send data to a public location, but only the holder of the private keys for that specific location can access it. Even blockchain addresses are cryptographic entities. They are built in tandem with a public key. Such addresses hold sensitive information and can be accessed only with the private key that created the address.
The benefit of this arrangement is that users require a secure method to store their private and public keys for the blockchain. Wallets ensure this by providing chain interaction via private keys. The wallet itself is password protected. The wallet also controls users’ public keys, allowing them to accept transactions. Consequently, the crypto wallet keys are quite important.
In the case of a physical wallet, funds can be accessed via fiat currency, bank or credit cards. But in the case of a crypto wallet, there’s no actual cryptocurrency that’s held up. Instead, it holds classified credentials needed in the form of private keys to gain access to the blockchain for a said cryptocurrency.
In the case of traditional banks, bank accounts with account numbers are created in the user’s name. But with a cryptocurrency blockchain, the public key serves the same purpose as a bank account number. But to make a complete set of transactions with an account, it’s not just enough to have a bank account number or a public key.
Blockchain functions on a public key infrastructure model for cryptography – you have a public key, and a private key and only the users who hold an asset or cryptocurrency know about it. It’s essential to have both a public key and a private key to access and transfer cryptocurrency.
Crypto wallets hold users’ private keys and information where the public keys are located on the blockchain. With the combination of public and private keys, a crypto wallet can enable a secured operation to validate a balance and send or receive cryptocurrency transactions.
When selecting a storage solution for your cryptocurrency, you should assess your risk tolerance, ambitions, and level of crypto understanding. Cold storage may make sense if you want to store your coins long-term and have no trading plans. However, if you are a newbie and normally cautious with your investments, you may prefer the ease of purchasing and storing your coins within the exchange.
Wrapping it up
Your crypto wallet is your everything – it allows you to check your balance, make transactions, and connect to decentralized applications. There are other wallets as well that use a single application to manage several accounts. To be true, wallets do not hold the custody of your funds; it’s you. Wallets just allow you to manage what’s yours.
