Crypto wallets

Introduction to 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

Types of Crypto 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)

Create your 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
• Smart contract non-custodial wallet - Argent - tutorial
• Custodial, centralized exchange - Binance - tutorial & go through the KYC process

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