Crypto Wallets

In principle, any application that includes functions for storing and handling crypto-currencies can be called a crypto wallet. An overview of the functions and types of crypto wallets will be provided in this article. It is also important to note that virtual coins and tokens are not stored on the wallet itself, but on the blockchain.    Public address and private key  The coins/token on the block chain are assigned to a publicly visible address. These addresses can be viewed with blockexplorers. Apart from privacy coin logs, transaction histories and balances of addresses are publicly accessible. The public address is generated from the private key by a complex mathematical algorithm. It is almost impossible to reverse the process by generating a private key from a public key. Only the owner of the private key has access to the coins/token.  A wallet software is used to access and keep track of your crypto currencies   There are crypto wallets that can only manage the coins of a specific crypto currency and there are wallets that can control multiple crypto assets (multicoin wallet).  A wallet stores the users private key. When a transaction is initiated, the wallet software creates a digital signature by processing the transaction with the private key. This ensures a secure system, since the only way to generate a valid signature for a particular transaction is to use the private key.  While the private key guarantees access to an individual addresses, wallets often contain a seed. The seed can be used to reinstall wallet software and restore the private keys and associated addresses.
Seed > Private Key > Address (Public Key) Note: The public address can be shared. The public address is the address with which you can receive crypto-currencies (comparable to a mailbox address). Private keys and seeds, on the other hand, must never be publicly available. With them you have access to the crypto-currencies (keys to the mailbox). If private keys and seeds are lost, the crypto-currencies are also lost.
A rule of thumb is: The easier it is to set up a crypto wallet, the less control you have over it. There are basically two types of wallets: in one case you are the owner of the private keys, in the other you are not (less secure). A distinction is also made between different types of wallet. Below is an overview, starting with the simplest variant.   Online Wallet   The term “online wallets” generally refers to web wallets and other services that can be accessed via a browser. Additionally, crypto-values which are held via trading platforms fall into this category. Storing excessive amounts on online wallets or at central exchanges should generally be avoided, as they bear the risk of falling victim to a computer hack. In the past, there have been a number of prominent cases where services have been hacked or the operators themselves have misappropriated the crypto assets. This behavior is only possible because you do not have your own private keys.   Web wallets offer the possibility to control coins and tokens online. These were particularly popular in the early days of the crypto era, as secure solutions were still very complex to use at that time. In the meantime, pure web wallets are a taboo and should no longer be used, since it is never certain who has access to the crypto assets and who is behind the services.  Although trading platforms or even exchanges are usually considered relatively secure, as they are often backed by a company with corresponding reputation risks, there are risks there too.  In addition to hacks, which have also affected prominent exchanges in the past, access to personal accounts can also be blocked. This can be due to new compliance regulations introduced by the stock exchange, or it can simply happen by mistake. Bankruptcy of the trading platform cannot be ruled out either. In this case, it remains open how much of the remaining crypto-values would flow back to the users. Classical problems like phishing and other hacker attacks are also a danger. Two-factor authentication should be used for the login. Exchanges should therefore only have short-term capital available, which should be available for trading.  Mobile Wallet   With mobile wallets you can check your crypto values on a smartphone or tablet. After downloading a mobile wallet app, an account is often created to access your crypto assets. An advantage of mobile wallets is the possibility to scan QR codes which can be read with the camera of the smartphone. This is advantageous for payments, because in contrast to manual entry or copying the destination address, no errors can occur. Also, the transaction costs to be paid are already included in the amount to ensure processing on the block chain.  Mobile wallets also have similar risks like the exchanges. On the one hand there is a dependence on the manufacturer, on the other hand hacks are potentially possible. There are apps that work with a login and apps that store the wallet data locally on the device. This way you usually have control over the private keys or the seed. It is best to treat it like a wallet with cash. You only keep as many crypto values in the wallet as you actually want to spend in the near future. Well-known examples are the BRD Wallet or Coinomi Wallet. Desktop Wallet  Each public blockchain protocol of a crypto currency usually provides a desktop wallet to the users. Without this software, it is not possible to transfer the coins and integrate them into services such as exchanges. The situation is different for tokens, since they operate on the network of a platform coin (for example, Ethereum). In this case a wallet of the platform coins is sufficient to be able to act in accordance with the tokens that were created above.   Desktop Wallets are available in different forms. Classically, they come with a graphical user interface. An often used wallet is the Electrum Wallet, which is adapted to almost every coin. But there are also command line based versions, which take the approach to be minimalistic, to offer less attack surfaces for hackers. Also here the danger of a hack is present, so it is important to protect your computer. Since you control your private keys yourself, a backup of them should be created in any case. Desktop wallets should not be used by private individuals for storing large sums of money as long as they are not used in combination with a hardware wallet (see below).  Hardware Wallet  A hardware wallet is a device on which the private keys of crypto assets can be stored. In theory, this can be a simple USB stick, but this does not bring any additional functionality. Well-known hardware wallets like TrezorLedger and Bitbox offer different web interfaces to online services.  It should be noted that these devices do not support all crypto assets. And even more importantly, the so-called seeds or words for recovery in case of loss of the hardware wallets must be stored securely. Hardware wallets offer private users the highest security standard when used correctly.  Paper Wallet  A paper wallet is an offline mechanism for storing crypto-currencies. In a paper wallet, the public address and private key are printed offline or written down on a sheet of paper. Also known as physical wallets, they are considered one of the most secure ways to store crypto-values if they are properly constructed and if certain precautions are taken.  Paper wallets can be generated using an open source wallet generator. It is generally recommended that users disconnect their internet access while the keys are being generated and that users delete their internet history after the keys are generated. Ideally, the keys should be created on a brand new computer to completely avoid malware interference.  Finally, the paper wallet is stored in a secure location such as a bank vault. Here, the physical piece of paper must be protected from physical damage. If the keys fade and can no longer be read, the user will no longer be able to access the crypto values stored at this address.  Summary: What do I need to keep in mind for crypto wallets in general?  Online services are not suitable for the safekeeping of larger crypto-values. A backup of the private key and the seed should always be made (storage of the backup outside the internet, for example on a USB stick).Provision should be made for the event of your own death, so that the crypto assets are not lost. Transfers of crypto assets should be done with the necessary caution. It is important to compare wallet addresses before making a transaction. Transactions on the blockchain cannot be reversed!  * Originally published in German at 

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