Apr 28, 2024 1:13:57 AM

Wallets are software that can create, store, and use private keys to sign messages, transactions and move coins and tokens on the blockchain. In early blockchains, wallets were features built into the participants’ core software, known as node clients. Currently, wallets exist separately from node clients and have a well-defined purpose.

Before we look at the different types of wallets, let’s talk about the difference between wallets and exchanges. Exchanges are places where one can buy and sell tokens, but the tokens purchased remain in the custody of the exchange. While these tokens are legally yours, they technically still belong to the exchange because they can be transferred using a private key that you don’t have access to. Well-known writer and entrepreneur Andreas Antonopoulos has a famous quote about it.

Your keys, your tokens. Not your keys, not your tokens.

If you want to have control over your coins and tokens without the need for intermediaries, you need to transfer them to your account, which is managed by your wallet. The terms accounts and wallets are often used interchangeably, but technically the blockchain is made up of accounts that hold assets, and wallets are software that manage accounts.

Another issue that causes confusion regarding wallets is that they would hold your coins and tokens. This is not correct. Coins and assets are associated with accounts, and such information is stored on the blockchain, not in wallets. Wallets store private keys. However, it is through private keys that we transfer coins and tokens, so although wallets do not hold assets, they have the key to move them.

There are different types of wallets and several ways to classify them. We can sort them by the environment where they are executed, such as desktop wallets, browser wallets, or mobile wallets. There are also hardware wallets, which are similar to a pen drive. Their purpose is the same, to manage keys, but each one has a level of security and practicality.

Another way to classify wallets is into hot and cold ones. We say that a wallet is hot when it is directly connected to the Internet, as in the case of browser wallets and mobile wallets. They are generally more practical, since they are easy to use to carry out transactions. However, because they are directly connected to the Internet, they are also less secure and more prone to attacks.

Cold wallets are those that are not connected to the Internet. They are used to signing transactions but cannot send them, as they are never connected to the Internet. Thus, hardware wallets must be used in conjunction with other software, which makes them less practical but quite secure. Being offline, the private key will never be exposed, and there is no way to suffer attacks through the network.

Another form of cold wallet is simply storing the private key on a piece of paper and keeping it in a safe place. Although secure, keeping the private key on a piece of paper is not very practical and is not capable of signing transactions. But it is the best way to back up private keys.