Cryptocurrency wallets are devices, physical mediums, programs, or services which contain pairs of public and private cryptographic keys used for:
- Storing public and/or private keys,
- Offering functionality of encrypting and/or signing information
- Executing smart contracts,
- Tracking ownership, receiving, or spending cryptocurrencies.
After an investor decides to buy or mine digital currency, they must then determine where and how to store their tokens. Cryptocurrency wallets are commonly used to store and protect these holdings, and they come in many different forms and varieties.
Wallets can be broken down into three distinct categories – software, hardware, and paper. Software wallets can be a desktop, mobile or online wallets. Here is a short summary of wallet types:
- eIDAS: The European Union is creating an eIDAS compatible European Self-Sovereign Identity Framework (ESSIF) which runs on the European Blockchain Services Infrastructure (EBSI). The EBSI wallet is designed to (securely) provide information, an eID and to sign transactions.
- Multi-signature Wallet: Instead of one party to sign a transaction, multi-signature wallets require multiple parties to sign a transaction.
- Smart Contract: Smart contract is a wallet type which is digitally signed in the same way as a cryptocurrency transaction is signed. The signing keys are held in a crypto(currency) wallet.
- Deterministic Wallet: Deterministic wallets are used for generating an entire tree of key pairs.
- Non-Deterministic Wallet: In a non-deterministic wallet, each key is randomly generated on its own accord, and they are not seeded from a common key.
- Hot Wallet: Hot wallet is a cryptocurrency wallet that is connected to the internet and allows a cryptocurrency owner to receive and send tokens. Generally hot wallets are easier to set up, access, and accept more tokens. They enable quick access to cryptocurrency accounts. They are easy to use and linked with public and private keys that help to facilitate transactions and act as a security measure. Because hot wallets have internet connection and public and private keys are stored on the internet, they tend to be more vulnerable to hacks and theft than cold storage methods. The safety and security of a hot wallet are largely dependent upon the user's behaviour. Experienced cryptocurrency investors prefer keeping a small portion of their holdings in their hot wallet because it is less likely that a hacker will break into a hot wallet for a small number of tokens. They are also more susceptible to possible regulation, and other technical vulnerabilities. There are a variety of hot wallets available for investors and many of them are free to download. Some wallets are specifically designed to be used in partnership with mobile web applications or even with certain cryptocurrencies.
- Cold Wallet: Cold wallet stores crypto assets in non-connected spaces completely offline which provide a greater level of safety. Generally cold wallets are more secure; however, they do not accept as many cryptocurrencies like hot wallets. Cold storage devices cost approximately $80 USD, whereas hot wallets are free. Consequently, cold wallets are found as not ideal for quick or regular transactions.
Unlike traditional ‘pocket’ wallets, digital wallets do not store currency. In fact, currencies do not get stored in any single location or exist anywhere in any physical form. All that exists are records of transactions stored on the blockchain.
For a cryptocurrency investor, the cryptographic public keys and private keys are the most important elements of a cryptocurrency wallet. Public keys are like account usernames; they identify the wallet so that the user can receive tokens without revealing their identity. Private keys are like pin numbers; they allow the user to access the wallet and check balances, initiate transactions, and more. Without either of these keys, the wallet is effectively useless.
There are different stakeholders; private investors, academic research, or government action groups; which are trying to develop more secure and sustainable hot wallets against attacks. Increasing security and facility in wallet management, cryptocurrencies will be demanded more by investors who have different risk appetite levels. For any further questions, please reach us via firstname.lastname@example.org or visit our CryptoIndexSeriesTM Platform for better analysis of the crypto market space.
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