Throughout history, the banking and monetary systems have been and essentially continue to be centralized. The money you “own” is never really yours, and unless you have it fully in cash under the mattress of your room, it’s never really under your control. All monetary digital transactions use several intermediaries to approve and complete the transaction.
But since the Bitcoin whitepaper was released and Satoshi Nakamoto found a solution for the double-spend problem (and for a completely decentralized digital currency), things started to change. With the advent of blockchain technology, we began to see the benefits of decentralization and decentralized monetary systems. Users can buy, send and receive money and assets independently without needing centralized authorities to facilitate the transaction.
But blockchain is only the decentralized ledger of information. You need a way to interact with it directly to perform transactions. This is where crypto wallets become a critical piece of the puzzle: they allow you to interact with a decentralized blockchain.
Today, our article will briefly cover how they work, why they are an essential element for public blockchains to work, some drawbacks and dangers you have on using wallets, and then we’ll also provide you with some examples on how to get started.
Not your keys, not your coins
You may have heard this adage before: “not your keys, not your coins.”
This phrase is commonly used and stresses the importance of looking after your digital assets and not leaving them under the control of a centralized entity (a bank, an exchange, or even a friend). But it also refers to an important part of interacting with your funds on the blockchain: your public & private keys.
Unlike an everyday wallet, crypto wallets don’t store any assets. Instead, your holdings live on the blockchain, and you use a combination of public & private keys to send instructions for wallet actions. Your Public Key is your address, and by nature of its name, can be seen publicly by everyone. Your public key is what you send to others so they can send you crypto assets.
Your private key is another story. By its name, you can tell that you should (and must) keep your private key private in order to secure your funds from theft or loss. Never share your private key with anyone, and never store it online.
The public key is linked to your private key because it is the private key that derives the public key through a cryptographic algorithm. Many public keys can be derived from and controlled by a single private key.
Your private key is stored in your crypto wallet, which allows you to use your private key to sign transactions for funds associated with a public key. Functions such as proving ownership of your digital money and allowing you to make transactions on-chain with that money are common uses of wallets.
Lose access to your private keys, and you will lose access to all your money and assets. Therefore, “not your keys, not your coins.”
Why Crypto Wallets?
In a simple manner, you can somehow compare crypto wallets to your bank account… but instead of that account being stored and managed by a bank, it’s entirely controlled by you. Another example is, if you keep cryptocurrency on an exchange, then the exchange is the custodian of your private keys; you’re trusting it with your keys in the same way you’d trust a bank’s vault to hold your gold.
So, what’s the point of using crypto wallets and blockchain, you might ask? It all seems like a lot of trouble when you can simply have your money in the bank.
First, a self-custody wallet puts you in complete control of your assets. By using a Non-custodial wallet, you’re not relying on a centralized third party — or a “custodian” — to keep your crypto safe.
One of the most significant advantages of crypto is that you don’t need to be tied to a financial institution to keep your money safe, and control where your money goes and how it is spent. By comparison, money in a bank is technically the bank’s property, and they can (and do) use it for several financial operations on their end.
Also, with crypto wallets, you don’t need to go through all the procedures, hurdles, and requirements to open a bank account with self-custody. Instead, you can be your own bank.
Secondly, cryptocurrencies are also programmable tokens, that will give you access to much more applications and use cases than simply financial instruments. The entire Web3 movement is built around this concept, and you’ll need a Wallet for those use cases.
This extends the possibilities beyond simply managing digital money, to managing a whole entire set of digital assets like NFTs, Tickets, Certificates.
What can you do with Crypto Wallets?
In the early days’ wallets were simple command-based programs, or paper wallets, that users would use to control and manage private keys, but things have evolved a lot since then.
Here is a set of different usages you can now expect from wallets. You can:
1) Manage all your digital assets in one single place;
2) Send and receive cryptocurrency to and from anywhere in the world ;
3) Manage an address book and interact with usernames rather than long, hexadecimal “public key” addresses;
4) Use Decentralized applications like games and others;
5) Use DeFi protocols;
6) Buy, sell, and visualize NFTs;
7) Shop at stores that accept cryptocurrency;
The dangers of Crypto Wallets
The reality is that self-custody is one of the more intimidating sides of crypto. Using and adopting Crypto Wallets certainly has several benefits as you have complete control, at any time, of your assets, but self-ownership also has a few drawbacks:
1) Becoming your own bank means you have to assume 100% liability for anything that goes wrong. There’s no one to call if you make a wrong transaction and no way to reverse it.
2) You have to be disciplined enough to manage your access keys and information. As mentioned above, losing your keys will lose access to all your assets forever.
3) Learning curve. Using a crypto wallet requires basic computer knowledge and getting familiar with a new financial ecosystem. Although many advancements have been made, it’s still not easy to get onboarded.
Setting up a wallet
The exact process of setting up a wallet changes from wallet to wallet but usually requires the following steps:
- Download a wallet app. See the end of the article for some options.
- Create your account. This step will create your public/private key pair. You won’t need to share any personal info to create a non-custodial wallet. Not even an email address.
- Write down your private key. The most important step! After creation, most wallets present your private key using a random 12-word phrase. Keep it in a secure location, and don’t lose it! Never take a photo of your private key / words and never store it online in an email or cloud storage service.
- Transfer crypto to your wallet. You should be set and ready to send crypto to your wallet to start using it. Some wallets offer a service to buy crypto using traditional currencies (like USD or EUR). Still, you’ll need to transfer and top-up crypto into your non-custodial wallet from elsewhere.
Hot vs Cold Wallets
After you start getting the hang of using your wallets and being your custodian, you’ll be facing an important decision eventually: choosing between holding cryptocurrency in a “hot” wallet, a “cold” wallet (or maybe a combination of the two).
Hot wallets are usually Web-based wallets, mobile wallets, and desktop wallets. The characteristic of a Hot Wallet is that they are connected to the internet and always online. The most significant benefit is the ease of use and simplicity, but they are usually less secure and could lead to stolen funds — but it’s faster and makes it easier to trade or spend crypto.
A cold wallet is also usually called a Hardware Wallet, and it’s not connected to the internet. They are certainly much more secure, but their trade-off is that they’re burdensome to use. Most hardware wallets live on devices like USB sticks.
A hot wallet is usually the best solution if you regularly use a wallet. However, funds or assets you don’t manage or access are often better stored on a cold, hardware wallet.
Examples of Wallets
Finally, here’s a few examples of wallets in different blockchains.
- Exodus — Exodus is a Bitcoin wallet and lets you interact with the Bitcoin Blockchain.
You can see here details on how to set it up: https://support.exodus.com/article/37-how-do-i-get-started-with-exodus
- Metamask — Metamask is probably one of the most used wallets globally. It’s initially targeted at Ethereum Network, but it allows you to go multi-chain and connect with several other EVM (Ethereum Virtual Machine) based networks such as Binance Smart Chain, Polygon, CELO, and so on.
You can see here details on how to set it up: https://metamask.io/faqs/
- Phantom — Phantom is the most used wallet in the Solana Ecosystem and blockchain
You can see here details on how to set it up here: https://phantom.app/help/getting-started
- Ledger — Hardware wallet. Compatible with different chains too.
You can see details on how to set it up here: https://www.ledger.com/start
We hope this information was helpful, and it allowed us to clarify some questions and doubts you might have about wallets. Hopefully, it also encourages you to dig deeper into managing your assets in your decentralized wallet.
If you have questions or ideas around the topic, feel free to reach out directly to us, and I’ll be happy to help! Just ping me directly at email@example.com!
About BEPRO Network
BEPRO Network is a codebase for DeFi, Gaming, Prediction Markets & More. We are a Code-as-a-Service protocol providing technology and support for blockchain-based applications.