Get to know the difference between different wallet types and set your first wallets

Crypto wallets

**Crypto wallet** at its essence represents a pair of information - your **private key** (imagine it as a super important password) and your **public wallet address** (imagine it as your user id). 

Your private key can be represented as a **seed phrase**, which is a series of 12 or 24 words (in exact order) that give you access to your wallet.

Your public address can be derived from your private key / seed phrase, but knowing your public address means nothing in revealing your private key. Therefore, your funds are safe as long as your private key is stored safely. 

Your funds are stored on blockchain (and not in your crypto wallet, like people intuitively think), so the balance of each wallet address is public information. Signing transactions (sending your crypto to another wallet address) requires your private key. Since there is no way to revert anything that happened on the blockchain (which is called the blockchain immutability), if any malicious actor gets to know your private key, your funds will be stolen. In that case there is no bank or any regulatory authority to give you back your money.

Since this can be a huge responsibility that many people don’t want to take on themselves, there is the option to look for more convenient crypto wallet solutions, where you essentially delegate your trust to a certain entity. In that case you don’t have a private key, and you don’t control your crypto, but you believe that the solution in place has a good reputation and secure environment to control your funds instead of you (similar to the bank). Centralized exchanges (CEXs), such as Binance, Kraken, Cex.io, Poloniex have this model, and these are called **custodial** wallet solutions.

Therefore, first takeaways to remember:

* Never share your private key or seed phrase with anyone (and it’s never needed for troubleshooting purposes, so real customer support agent will never ask you that)
* Decide on your own what is the right balance between holding your private keys on your own (non-custodial solution) and delegating control to someone else (custodial solution)
* Even when you delegate the control, make sure that you use strong password and enable 2FA whenever possible

Introduction to Wallets

Based on the fact of whether a wallet is connected to the internet or not, there are two different types of crypto wallets: **hot** and **cold** ones. 

Hot wallets are connected to the internet, hence they are less secure, as you are always a target for hackers, but they are convenient for frequent transactions, such as trading operations or interaction with decentralized applications. Even though they are less secure, you do not have to worry as long as your private keys are safely stored.

The main advantage of cold wallets is security and the fact that your private keys are stored offline, far away from malicious hackers and other dangerous threats that can harm your funds’ safety. They represent a physical object such as **paper** or **hardware** device which serves as storage for your keys.

Paper wallets are physically printed keys (often represented as a QR code), convenient for gift cards, or keeping in safe storage.

Hardware wallets are devices that look like a USB with a small screen and side buttons, without battery. They can be connected to your computer via their native desktop or web apps.

Hot wallets are software-based wallets. **Software**-based wallets can be **desktop** (your private key is stored on your computer), **mobile** (your private key is stored on your mobile phone) or **web** wallets (your private key is stored in your browser's data store). 

For Ethereum based currencies **smart contract** wallets are becoming popular, as they balance security and convenience and often offer better UX. Smart contracts are open-source (verifiable) programs running automatically on the blockchain when predefined criteria are met. This allows wallet applications to give you the full, decentralized control over your assets, and develop functionalities such as:

* Two factor authentication (2FA)
* Social account recovery mechanisms through family or friends
* Transaction limitations (similar to ATM)
* Fraud alerts
* Emergency account freezing
* Multi-signature authorization
* Whitelisting destination addresses
* Bundled transactions
* No fees (Gasless transactions - delegating gas cost to another account)

Types of Crypto Wallets

Now when you understand the difference between crypto wallets, let's try some of them. 

For the purpose of this exercise, we’ll create three different wallets / accounts:

* Web non-custodial wallet - **Metamask** - [tutorial](https://metamask.zendesk.com/hc/en-us/articles/360015489531-Getting-started-with-MetaMask)
* Smart contract non-custodial wallet - **Argent** - [tutorial](https://support.argent.xyz/hc/en-us/articles/360022512752-How-to-create-an-Argent-wallet)
* Custodial, centralized exchange - **Binance** - [tutorial](https://www.binance.com/en/support/faq/115003764911) & go through the [KYC process](https://www.binance.com/en/blog/ecosystem/%E2%80%8Bwhat-is-kyc-or-identity-verification-and-how-is-it-increasingly-important-for-crypto-421499824684902130)

Once you have successfully created all these wallets, you can move to the next step and start playing around with testnets.

Create your Crypto Wallets

Try several operations on your own with test assets

Play with Testnet

Testnets are alternative blockchain networks (replicas) used for testing purposes. Popular Ethereum testnets are, Kovan, Goerli, Sepolia, Linea and you can find all of them at your Metamask. 

In order to play around and start exploring some common actions, we’ll need some test crypto to fund our Metamask account. In order to get these test tokens, we’ll use some of the faucet solutions. Note that these test tokens don’t have any actual value and can’t be transferred to the mainnet. 


   1. Get to know some essential terms [here](https://metamask.zendesk.com/hc/en-us/articles/360015489611-Learn-the-basics-of-blockchains-and-Ethereum-miners-and-validators-gas-cryptocurrencies-and-NFTs-block-explorer-networks-etc-) before diving into the specific exercise 

   2. Choose one of the testnets and fund your address through one of the popular faucets:

      * [Chainlink](https://faucets.chain.link/)
      * [Paradigm](https://faucet.paradigm.xyz/)
      * [Polygon](https://faucet.polygon.technology/)
      
   3. [Create additional account](https://metamask.zendesk.com/hc/en-us/articles/360015289452-How-to-create-an-additional-account-in-your-MetaMask-wallet) (new address) at your Metamask

   4. Send some test token from one address to another ([here](https://metamask.zendesk.com/hc/en-us/articles/360015488931-How-to-send-ETH-and-ERC-20-tokens-from-your-MetaMask-wallet) & [here](https://metamask.zendesk.com/hc/en-us/articles/360028141672-Direct-deposit-receive-tokens-to-your-MetaMask-wallet) you can find some help)

   5. Go to app.uniswap.org and try Swap, then Pool functionality at the testnet (read more about Uniswap [here](https://docs.uniswap.org/protocol/introduction))

   6. Explore same options at app.sushi.com

   7. Try cowswap.exchange through Goerli network

   8. Buy your first [NFT](https://ethereum.org/en/nft/) at testnets.opensea.io 

   9. Review your transactions at the blockchain explorer, such as etherscan.io (make sure that you are looking at the correct testnet, such as kovan.etherscan.io or goerli.etherscan.io for example) - read more about transactions [here](https://info.etherscan.com/understanding-an-ethereum-transaction/)

Get your first crypto

Now when you have tried core protocols on tesnets, it’s time for some real stuff.

Buying crypto might get very expensive for two reasons - payment processing fees are usually somewhere around 3% and withdrawal fees (transactions that are needed in order to get the crypto asset in your wallet) can be high due to the blockchain transaction costs. Therefore, if the withdrawal fee is $30 on Ethereum blockchain, it can easily happen that you invest $100 on exchange and end up with less than $60 in your wallet. 

International bank transfers are usually the most cost-effective way, but since that’s also challenging for the Balkan region, we’ll focus here on purchasing crypto with your credit card.

[Here](https://www.binance.com/en/support/faq/8df758a570ba4d18941f38423f63aae5) you can find a tutorial on how to buy crypto with a Credit / Debit card through Binance. 

We suggest that you buy Matic tokens and transfer them to your Metamask through the Polygon network (in order to reduce withdrawal fees). Once when you have assets in your Metamask wallet, you can go to the next part “Explore Sidechains & Scaling Solutions” and try multiple exchanges and different scaling solutions.

Explore Sidechains & Scaling Solutions

As you are getting deeper into the rabbit hole, it’s time to face some hot crypto problems. 

As the number of Ethereum users is growing, there are certain limitations in capacity, which result in slower and more expensive transactions (high gas cost). It’s hard to address these issues without sacrificing decentralization (and thus the security of the blockchain).

To dive deeper into the problem of scalability, you can read [this](https://ethereum.org/en/developers/docs/scaling/) article. Sidechains are explained [here](https://ethereum.org/en/developers/docs/scaling/sidechains/).

We’ll explore Polygon, Arbitrum and Optimism.

📚 Read more 📚

* Get to know Arbitrum and Optimism through [this video](https://youtu.be/7pWxCklcNsU)
* Polygon through [this video](https://youtu.be/IijtdpAtOt0)
* Comparison of all three solutions [here](https://morioh.com/p/8ede541f6252)

For the purpose of this exercise, the first thing that we’ll need to do is to add new (Custom RPC) networks to the Metamask. [Here](https://metamask.zendesk.com/hc/en-us/articles/360043227612-How-to-add-a-custom-network-RPC) is a guide on how to do that.

In order to transfer assets from one chain to another, we usually use different blockchain [bridges](https://coinmarketcap.com/alexandria/article/what-are-blockchain-bridges). These transactions (when moving from Layer 1 Ethereum mainnet) can be expensive due to the high gas cost, so you don’t need to try them on your own in this tutorial. Instead, you will use the assets that you already have on Polygon from our previous exercise “Get your first crypto”.

If you want to explore bridges on your own, a user guide on bridging the assets from Ethereum to Polygon can be found [here](https://consensys.net/blog/metamask/how-to-bridge-tokens-from-ethereum-to-polygon-with-metamask/). 

Here are the links to different bridge solutions:

* [Polygon Web Wallet](https://wallet.polygon.technology) with the bridge functionality
* [Arbitrum bridge](https://bridge.arbitrum.io)
* [Optimism bridges](https://www.optimism.io/apps/bridges)

Practice:

1. Move part of your assets that we withdrew from Binance through previous exercise from Polygon to Arbitrum using the [Hop Exchange](https://hop.exchange)
2. Move part of your assets to Optimism (again using the Hop Exchange)
3. Try [1inch](https://app.1inch.io) on all three networks
4. Try [Uniswap](https://app.uniswap.org) on Arbitrum and Optimism
5. Try [Quickswap](https://quickswap.exchange) on Polygon

Practice resources

* [Rabbithole](https://rabbithole.gg/)
* [Zapper](https://zapper.fi/)
* [Layer3](https://layer3.xyz/)