Crypto wallets: how to store cryptocurrency
26.09.2022 | asorokin
Any assets, including money, in whatever form they may be, must be stored somewhere. Wallets are usually used for this. This method of saving finances concerns not only cash, but also digital currencies.
Special wallets with varying degrees of protection are used to store cryptocurrencies and NFT.
Why do we need crypto wallets
In fact, there is no cryptocurrency in the crypto wallet, it stores the key to access the owner’s assets. The wallet works similarly to a virtual or physical bank card. There is no money inside it either, they are in the bank, but with its help they can be withdrawn, spent or sent to someone.
The wallet consists of an address, the equivalent of a card number — an open (public) key, and a private (private) key — a code used to confirm the transaction. For bank cards, the CVC code performs a similar role.
Wallets are needed both for storing and sending cryptocurrencies, and for connecting to services. For example, in order to use the functionality of a decentralized exchange, you need a virtual wallet. Also, a wallet is almost always needed to register accounts in blockchain games.
Cryptocurrency wallets are divided by who has all the information about transactions stored and who can access the wallet.
These are wallets whose private keys are controlled by third parties. Not only the owner of the wallet has access to them. Custodial wallets are most often used on centralized exchanges (CEX), which act as the very third parties controlling private keys.
How Custodial Wallets work
Custodial wallets are integrated into the exchange account. For the user, they are one of the tabs that contains all the information about assets. All data is centrally stored on servers.
The private key of a non-custodial wallet is owned only by the user who created it. Services, exchanges or anyone else do not have access to the key and the passphrase to restore access.
Non-custodial wallets, unlike custodial ones, have a larger number of types. They can be in the form of:
- apps for your phone;
- browser extensions;
- programs on PC;
- account on the service’s website;
- a separate device similar to a USB flash drive.
Wallets in the form of a separate device are called hardware. You can read about them in a separate article. This type is the safest in terms of hacking and key theft.
How non-custodial wallets work
Such wallets are not integrated into the ecosystem of the exchange, they work independently and can be connected to any service that supports them.
The most popular option for a non-custodial wallet is online wallets with the ability to use several formats at once: a browser extension, a phone application and a website.
Such wallets are the easiest to connect to services and conduct transactions faster, since they work when connected to the Internet.
Which crypto wallet should you choose?
Ease of use
Custodial wallets are the best option for beginners, since third parties with access to private keys are responsible for all the difficulties in conducting transactions. Before using such a wallet, you do not need to delve into the mechanics of its operation. For example, in many non-custodial wallets, it is necessary to switch the network, depending on which one is supported by the service you want to use. The custodial wallet does not have such a complication.
Restoring access in case of password loss
It is easier to restore access to custodial wallets. Due to the fact that the private key is stored by a third party, the user goes through several stages of verification and most often confirms his identity. This allows you to contact the support of the service or the exchange, or restore access yourself.
A non—custodial wallet cannot be restored if the key is lost, since the user is the sole owner.
Transactions through custodial wallets are slower than through non-custodial wallets, since additional confirmation is required for custodial wallets.
Opacity of translations
Only a third party storing private keys has access to complete information about transactions of custodial wallets. Non-custodial wallets give owners all the information about their transactions.
The probability of theft of funds
Due to the fact that the custodial wallet is actually under the control of the exchange or the service, the user’s funds may be blocked or withdrawn without his knowledge and permission. To avoid such unpleasant situations, you need to carefully approach the choice of a wallet.
There are also multi-signature wallets. They protect the user from the possibility of transferring his funds without personal confirmation.
You can steal coins and tokens from a non-custodial wallet only if you have full access to it. To do this, scammers need to know the keys or the passphrase to restore access. If you carefully monitor your data, it will be impossible to access your wallet.
The most versatile wallet is a custodial online wallet. This type is supported most of all by decentralized platforms. With its help, you can trade on exchanges, send cryptocurrencies and tokens and use DeFi protocols.
Custodial and software wallets on PCs support fewer platforms. Custodial accounts are usually used only on the exchange on which it is created.
When choosing a wallet, you need to take into account your request, since there is no universal option for all occasions. You can also have several wallets at once, if one is not enough to cover all the needs at once.