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Cryptocurrencies can be risky enough to invest in. This is why it is necessary to keep them safe from all possible hazards, which include theft. But is it so simple to protect your crypto assets? Well, it might be a little easy due to the various tools and facilities that are available in the sector. One of them is a crypto wallet that is used to keep digital currency possessions safe. However, to be able to use this tool effectively, you need to first know what is a crypto wallet all about.
What Is A Crypto Wallet?
Well, to answer the question of what is a crypto wallet we would first note that it is a place to store your crypto assets. It basically enables one to transfer and store virtual currencies through it and one has a unique crypto wallet address. A cryptocurrency wallet makes use of a private key for its security. This private key is what users find to be complicated sometimes. This key is similar to the key that is needed to open a safe usually. Here the crypto wallet is the safe that we have been talking about. Whoever has access to the key can also get hold of the balance there.
For this reason, it is advised that the private key to your crypto wallet is not shared with any random person as that could be detrimental to your own savings. Some people make transactions using a non-custodial (wallet which is not provided by a crypto exchange or recognized third-party) crypto wallet. In this case, they become their own bank. To explain the concept of what is a crypto wallet and private key is about, let’s check what Joel Dietz, who is the founder of Art Wallet needs to say about it. Dietz mentioned, in an interview, that:
“It is similar to a bank account, but the main difference is it is controlled by a key that only you control. You use this key to initiate transactions, which is called ‘signing’.”
When the query of what is a crypto wallet is asked, we surely can’t omit the types of wallets that are existing out there. There are several divisions and subdivisions when it comes to the types of crypto wallets that are available for use. But before that, we would like to bring to light other important topics like what does a crypto wallet do and how they are used.
What Does A Crypto Wallet Do?
We know that you might also be wondering about what is a crypto wallet needed for. Therefore, we have curated five reasons why everyone in the blockchain or cryptocurrency sector need to use these wallets in today’s times.
- Crypto Fund Management: When the question of what does a crypto wallet do needs to be answered, the foremost point should be that it aids in crypto fund management. People who own any kind of crypto assets can store their possessions using a cryptocurrency wallet. All their investments and rewards can be stored in a single place, thus easing the management of individual earnings.
- Making Transactions: It is essential for someone in the crypto sector to make daily transactions. These can be easily performed using a crypto wallet. The concept of a crypto wallet address comes in here as digital currencies are transferred from one wallet to the other.
- Attaining An Identity Via Username: Every virtual currency that is developed on a blockchain. A cryptocurrency wallet is used to make transactions that come with a username that can be then connected to a public key address that exists on a blockchain.
- Connecting To Decentralized Apps (dApps): you might now be wondering what is a crypto wallet needed when DApps are considered. Well, in the case of such a cryptocurrency wallet is essential to connect or interact with dApps based on Web 3.0 technology.
- Management Of Keys: As noted earlier, crypto exists as a public key address on a blockchain. What is a crypto wallet required for in this situation? These wallets are able to manage the private encryption keys that are then used to gain access to a specific address to make a transaction.
How Does A Crypto Wallet Work?
After discussing what is a crypto wallet and why is it needed, it’s time to know how it works actually to understand the entire concept better. Blockchain uses a Distributed Ledger Technology for its operations and all transactions are based on blocks where all records a stored. So, it is safe to say that crypto coins cannot be stored ‘inside’ a wallet as they exist on the blockchain that they have been developed on. Then what does a crypto wallet do in this scenario? Its software lets one connect with the balances that have been stored on the blockchain.
The wallet stores the crypto wallet address required in the transaction along with the blockchain address, which is the primary requirement. It then enables one to send coins from one address to another without any hassle. Utsav Dar, the Co-Founder of Incub8 Finance, commented along similar lines and explained:
“Most Crypto wallets allow users to send, receive, and store crypto. Some have a feature to buy and spend cryptocurrencies. Certain crypto wallets have additional features like swapping between tokens, staking tokens for a fixed return paid out to users, as well as access to dApps (decentralized applications) built on various networks.”
The general steps involved in sending or receiving crypto funds using these wallets have been noted here.
- In order to receive funds one needs to acquire an address (a public key) from their wallet. For this, find the “generate address” option on the cryptocurrency wallet being used. Then click on it and copy the QR code or alphanumeric address to share with the person who will send the funds. This address is also known as a crypto wallet address.
- For sending funds, one would need the crypto wallet address of the recipient. Thereafter, find the ‘send’ option on the wallet in use and enter the address where the funds are to be sent. Then select the amount of crypto funds to be transferred and click on the ‘confirm’ button. One should consider sending a small amount of funds for testing before transferring a larger amount. It will also require a fee to process the transaction that would be paid to the miners.
Types Of Crypto Wallets
There are mainly two types of crypto wallets, namely, software and hardware wallets. Software crypto wallets are easy-to-use desktop programs or sometimes browser extensions that are used to store, send, and receive crypto funds. These are also known as ‘hot’ wallets since they store crypto assets online. The main types of software wallets have been discussed later in this section.
On the other hand, hardware crypto wallets are used for a similar purpose, however, they are physical gadgets that are plugged into a computer for use. They are also known as ‘cold’ wallets as they are used to hold private keys offline, which is similar to ‘cold’ storage.
The types of software crypto wallets are:
- Mobile Wallets: These software wallets are easily accessible through a mobile phone. They work by scanning a QR code on a smartphone. Example: Coinbase and Binance mobile wallets.
- Desktop Wallets: This work similar to those mobile crypto wallets but they can be operated through a desktop or a laptop. Example: Electrum Wallet.
- Web-Based Wallets: These refer to browser extensions that are used for connecting to crypto wallets. They work the same way as any other crypto wallet without the hassle of installation of any applications. Example: MetaMask wallet.
[Bonus: People often asked the question of ‘what crypto wallet should I use’. The answer to this is very simple. You just need to find a cryptocurrency wallet that is recognized legally and trustworthy. Therefore, rigorous research is needed. The next time someone asks ‘what crypto wallet should I use’ tell them the same answer.]
The Finishing Line!
We hope that now you understand what is a crypto wallet and the uses of it. Also, the types have been discussed briefly so that the understanding is better. Using crypto wallets might be a safe to store all your crypto assets but we would also like to warn you against some cases where it can prove to be detrimental. These crypto wallets might be hacked if the security system is not efficient enough. Therefore, it is always safe to use the ones recognized globally and are trustworthy.
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