Cryptocurrencies are completely digital, so you can send and receive them using any suitable digital Wallet on your computer or smartphone. However, it might surprise you to learn that cryptocurrencies are really not “stored” in wallets or anywhere close.
To explain it, your ownership is tied to a particular key linked to the wallet. Cryptocurrency wallets only provide an easy-to-use interface that allows you to interact with this key to verify you as the owner. Today’s wallet form factors vary widely, from mobile apps to devices like USB sticks.
Amazed? Let’s take a look at how crypto wallets work and what you need to know before creating your own.
What Exactly is a Cryptocurrency Wallet?
For decades, banks and other institutions were the only institutions able to provide access to financial services for the public. Now cryptocurrencies are threatening to take on this role. Moreover, its proponents argue that the technology can reach a wider audience than traditional banking. To understand how wallets fit into all of this, we first need to clarify how cryptocurrencies work under the hood.
Digital currency is often viewed as virtually saving a real coin inside a digital pocket or wallet. But this is not the case. Instead, cryptocurrency is better described as a network of digital records or transaction registers.
In the real sense, you do not have an account in the world book of cryptocurrencies, nor do you own coins saved in them. The digital wallet then acts as a key to that balance, like a password to your bank account. Though, wallets are used for more than just authentication.
As stated above, your balance information is stored online. New changes, such as inbound and outbound transactions, are also added to this ever-expanding dataset and then propagated to other members of the network. This is the reason why cryptocurrency is generally considered an innovative decentralized ledger technology or, more commonly, a blockchain technology.
So what exactly is the reason for wallets?
Basically, a wallets carries out the following functions;
- Show your cryptocurrency balance on the network.
- Provide an interface to send and receive transactions.
- Record past transactions.
How Does a Cryptocurrency Wallet Work?
Wallets store public and private keys and are linked to various blockchains, allowing users to track their balances, send money, and perform other transactions.
When someone sends you bitcoins or any other digital currency, they sign-off ownership of those coins to your wallet address. To use these coins and unlock funds, the private key stored in the wallet must match the public address to which the currency is assigned. When the public and private keys match, the balance in the digital wallet increases and the sender decreases. There is no real exchange of real coins. Transactions are displayed simply by writing them to the blockchain and changing the balance of the cryptocurrency portfolio.
Types of Cryptocurrency Wallet
Wallets can be Softwares, Hardwares, or Papers, and these offer different ways to store and access digital currencies.
Software wallets can be desktop, mobile, or online wallets.
Desktop wallet
A Desktop wallet is downloaded and installed on your computer or laptop. It can only be used on the computer where it was downloaded. Desktop wallets offer the highest level of security, but if your computer is compromised or infected, you could lose all your funds.
Online wallet
An Online wallet runs in the cloud and can be accessed from anywhere on any computer. While online wallets are more readily available, they are more vulnerable to hacking and theft as they store your private keys online and are controlled by a third party.
Mobile Wallet
Mobile wallets are useful because they run in an app on your phone and can be used anywhere, including retail. Mobile wallets are usually much smaller and simpler than desktop wallets due to the limited space on mobile devices.
Hardware Wallet
Hardware wallets differ from software wallets in that they store the user’s private key on a hardware device such as a USB. Hardware wallets perform online transactions but are stored offline for added security. Hardware wallets are compatible with multiple web interfaces and can support multiple currencies. It depends on what you want to use. The deals are straightforward as well. Users just need to connect their device to a computer or internet device, enter their PIN, send and confirm calls.
Paper Wallet
A Paper Wallet is easy to use and offers a very high level of security. The term paper wallet can only refer to physical or hard copies of public and private keys, but can also refer to software used to securely create and then print a key pair. Using a paper wallet is relatively easy. To transfer bitcoins or other currencies to a paper wallet, transfer funds from the software wallet to the public address displayed in the paper wallet. Alternatively, to withdraw or use money, simply transfer money from your paper wallet to a software wallet. This process, often referred to as “clearing”, can be done manually by entering your private key or by scanning your wallet’s QR code.
How Secure Are Cryptocurrency Wallets?
Your wallet is protected at different levels. The level of protection depends on the type of wallet you are using (desktop, mobile, online, paper, hardware) and your service provider. A web server is, in fact, a more dangerous environment for storing currencies than offline. Online wallets can expose users to possible vulnerabilities in wallet platforms that hackers can use to steal their money. On the other hand, offline wallets cannot be hacked because they are not connected to an online network and do not depend on third-party security.
Conclusion
Choosing the right cryptocurrency wallet that matches your desire is perhaps the most important choice you make when starting out. We hope this article helped you make that decision by giving you some insight into how cryptocurrency wallets work. Either way, don’t be afraid to try your hand on some software wallets which are free to download.
The post A Guide To Using Cryptocurrency Wallet appeared first on Innovation Village | Technology, Product Reviews, Business.
