The massive rise of crypto adoption has put this emerging sector closely to the world of traditional finance. And as such, storing digital assets became just as important as owning, trading, and utilizing cryptos for everyday payments.
Crypto wallets are a digital version of your everyday wallet, but exist with added cryptographic security, despite the type of a given crypto wallet. The vast majority of crypto wallets operate via public key/private key cryptography.
The goal is to secure your assets with a form of a cipher that only you know, called a passphrase or seed phrase. The passphrase uses words instead of random characters mashed together since it’s easier to remember. The passphrase controls access to send or spend your crypto assets.
Keeping your seed phrase in a secure place is of utter importance, because in an event of losing your seed phrase, you will not be able to gain access to your crypto holdings.
What are the main types of crypto wallets?
Hardware wallets store private keys on a specific device, about the size of a USB drive. However, the size and shape of hardware wallets depends on manufacturers. To spend or send your crypto to another wallet, you need to connect your hardware wallet to your PC to grant permission to any outgoing exchanges. These wallets are “cold” and non-custodial.
A desktop wallet is a product bundle introduced locally on a PC and keeps your keys on the PC. Desktop wallets provide greater flexibility than hardware wallets, such as staking and conducting swaps on decentralized exchanges. The available features a desktop wallet has can be different, as they depend on wallet developers. Desktop wallets could be either hot or cold, and, given the specifications of the wallet, they may not be Internet-enabled. Desktop wallets are also primarily non-custodial, giving users freedom of holding their cryptos.
A mobile wallet is working on the same principle as a desktop wallet, but it is intended for your smartphone. Additionally, the functionalities are more convenient to use with a few clicks because of the ease of network coverage a smartphone can provide and the simplicity to use QR codes for easier fund transactions. These wallets can be both custodial and non-custodial since many exchanges also offer access to mobile wallet applications.
Web wallets are available by accessing your favorite browser. They are usually developed as extensions, for example, in Chrome or Firefox, or through built-in wallets like in the Brave browser. However, these wallets are the most prone to hacker attack, but give the best degree of integration with your style of work. Experts recommend using web wallets only for specific transactions and with a specific amount of cryptos in order to protect your funds against malicious activities.
Paper wallets are maybe the most secure option to store your cryptos since they are simply a piece of paper, containing your keys or a QR code that grants access to your crypto holdings. These wallets are intended to be a last resort of security as long as nobody finds your piece of paper. However, securing your funds in such a manner is more cumbersome than using a hardware wallet.
Custodial or non-custodial?
Choosing a wallet type is only a part of the story since wallet providers can choose the type of custody over your funds. A general rule of thumb shows that hot wallets are usually custodial, meaning you are not certain whether a given entity would cut your access to the wallet. Cold wallets are primarily non-custodial since you purchase the device, which stores your private keys, hence – your crypto holdings.
Many of the world’s biggest crypto exchanges offer custodial wallets to their customers, which makes crypto transactions happen fast and easily. However, in an event of a hackers` attack, hot wallets become vulnerable and are usually the main target of hackers.
Non-custodial wallets enable you to have full control over your own assets since no one else has access to your wallets unless authorized by you and you only.
Single-chain or multi-chain?
The fast evolution of cryptocurrencies and their global reach spawned many projects, each with its distinctive network features. For example, you may want to purchase Bitcoin, Ethereum, EOS, Dogecoin, or any other crypto available on the market.
However, most cryptocurrencies operate on their own blockchains, making interoperability а challenge. Single chain wallets actually started their existence with the birth of the given blockchain. They offer native support and good connectivity for crypto transactions.
Multi-chain wallets, on the other hand, offer enhanced flexibility, allowing you to access all of your crypto funds from a single wallet. Furthermore, many prepaid card services allow you to connect the card with your wallet, which further adds to the convenience of paying for your desired goods with crypto of your choice.
Multi-chain wallets also enable in-wallet swapping, without the need to access a given exchange, since the wallet developers usually take the swap on their platform.
There are two main differences between single-chain and multi-chain wallets, the first being the ability to access several wallets with just one passphrase. While accessing all of your crypto holdings using just a single passphrase could be seen as a security vulnerability, the benefits of the added simplicity of operations are without a doubt greater than the risks.
Furthermore, as blockchains evolve, using a multi-chain wallet proves to be the future of storing cryptocurrencies. Many wallet providers are starting to utilize the Ethereum Virtual Machine (EVM) compatibility to allow users to create other EVM Wallets having the same address as the Ethereum wallet.
The way crypto users store their currencies is evolving at the same pace as the crypto projects they support. Many wallet services providers are even working on bringing Web 3.0 functionalities like NFT storing and selling directly into their wallets, rather than going on marketplaces. As the crypto sector slowly establishes its position as a global industry, crypto wallets would also continue to develop, allowing even greater flexibility and functionalities.