What is a Blockchain Wallet?
November 7, 2018
Q: How do you carry your bitcoins?
A: In a wallet, of course.A wallet on any blockchain platform can be likened to a bank account, but without the hassle involved in opening the bank account. You can go to Bitcoin or Ether or MyEthereum.com and create your very own wallet in minutes. Unlike a bank account, your wallet becomes perpetual and cannot be closed or deleted, whether or not the owner of the wallet is amongst the living.
Like An Email Address, It’s Yours ForeverTo understand what a wallet is in the context of blockchain technology, let us take a piece of technology that most of us are familiar with: email. My email address is [email protected], and anyone who knows my address can reach me via email. They can “send” emails to this address but not from this address. To send emails from my address, one must have access to my account which requires a password and, in some cases, multi-level authentication. What an email address is to an email communication, a public address is to a blockchain wallet. A private key for a wallet is similar in concept to the password to my email account, except that you do not choose your private key like you would choose your password. A private key is usually a long string of random alpha-numeric cryptographic code generated by the blockchain itself. Instead of a long string of alphanumeric code, some wallets use seed word as a private key. A seed word is a random set of words generated during the creation of a wallet. For example, I created a wallet and the wallet generated 24 random words in sequence. When I try to access the wallet, it will prompt me to enter the word corresponding to a certain number, such as the number 9. Just because you are able to access your email from your smartphone or computer doesn’t mean that your email is housed on those systems. You are simply accessing email from the email server via your device. Similarly, your wallets do not hold your digital assets, they grant you access to your assets on the blockchain by the way of your private key access. If you lose the access key to your wallet, the digital assets that are in the wallet will continue to exist, but you will not have access to them. For example, all Bitcoins are on Bitcoin Blockchain. An estimated 3.78 million bitcoins (an estimated value of $8,000 per bitcoin) have been lost forever. The majority are lost because of Bitcoin holders losing access to their wallet. Or, if an investor dies without properly passing the private keys to their heirs, access to the Bitcoins associated with the wallet’s private keys are lost forever. In any of these cases, the Bitcoin itself is still on the blockchain, it just can’t be accessed by anyone without the private keys.
How Would You Like Your Wallet, Hot or Cold?Blockchain wallets can be broadly categorized into hot wallets or cold wallets. A hot wallet (H) is the one that is connected to the internet. For instance, Coinbase is a popular gateway for cryptocurrencies. To access the digital assets in your coinbase account you login to their website or download their app. When you access your digital assets, you are just viewing the information of these assets, you do not hold them in your account. If Coinbase is hacked and the digital assets are stolen, they could be lost forever. A cold wallet(C), on the other hand, stays offline. What stays offline are the private keys so that hackers and internet fraudsters can’t access the funds using private keys.
Type of WalletsDesktop (software) Wallet (H): You can download any public wallet onto your computer. If you own 10 different cryptocurrencies, you might end up needing to install 10 separate wallets. For instance, you can go to Bitcoin.com to download a Bitcoin wallet onto your desktop. Scanning the desktop for viruses and malware and having a trustworthy anti-virus software is very important to avoid any hostile takeover of the wallet and its digital assets on the desktop. Mobile Wallet (H): Mobile wallet is similar to desktop wallet except that you install it on your smartphone. Ease of use is the primary benefit of a mobile wallet. Keeping the phone safe and passcode secure are important to protect the private keys. Individuals have lost their digital assets by falling prey to phone scams. AT&T was recently sued by an investor who claimed his digital assets were stolen by hackers who gained access to his cellphone. Exchange Wallet (H):Whenever you open an account with digital asset exchanges, let’s say Coinbase for instance, you are immediately assigned an online wallet address for each asset. However, you are not provided the private keys. If Coinbase were to get hacked and all of the digital assets were stolen, there is no protection for your digital assets on this exchange wallet since you do not control private keys. Cloud wallet (H): Many do not see a difference between a wallet on an exchange and a cloud wallet. Conceptually, they are correct. However, from an end-user experience perspective, there is a difference. In an exchange wallet, as stated above, you do not own your private keys. In a strict cloud wallet model, like Myetherwallet.com, you own your private keys. You can receive and send digital assets from a cloud wallet. Hardware wallets (C): Hardware wallets have emerged as one of the most sought-after wallets to safeguard digital assets. Instead of relying on desktop or cloud wallet, a hardware wallet keeps the private keys offline. Hardware wallet like Trezor lets you perform transactions by connecting the device to your computer. If you are thinking to buy a hardware wallet, make sure you are not buying a used one. Many people sell their hardware wallets while keeping a copy of the private keys. Paper Wallets (C): Paper wallet is the one you create and print out on a paper. Most popular with crypto veterans, they create the wallet offline, print the wallet on paper using a printer not connected to the internet and leave no trace of the wallet other than the printed copy, thus creating a cold storage. While it offers the most security against hackers and online threats – this method bears the risk of losing the physical paper or someone getting their hands on the paper. Also, paper wallets are not designed to enable frequent transactions. This method is very effective to store digital assets held as a long-term investment. Multi-Asset Wallet: This is more of a feature than a type. A multi-asset wallet supports multiple digital assets. For instance, it may support Bitcoin, Ethereum, Stellar, etc. — all different blockchain currencies, stored in one wallet. Multi-Sig Wallets: This is yet another feature rather than a wallet type. Multi-signature wallets will require multiple layers of authentication. For instance, it may need a pin or passphrase in addition to your private key or seed word verification.
|Wallet Type||Hot/ Cold||Advantage||Security Flaw||Example||Precautions|
|Desktop Wallet||Hot||Ease of use and ready access||Connected to the internet, prone to phishing and hacks||Bitcoin, Ethereum||Install antivirus; limit the usage of computer for other activities; stay offline when not in use;|
|Web Wallet||Hot||Lite wallet, access from anywhere||Vulnerable to phishing and hacks||Coinbase||Activate two-factor authentication to access the account|
|Mobile Wallet||Hot||Easier access than desktop or web wallet and use of QR code for transactions||In addition to virus and phishing attacks, losing phone could pose additional threat to the assets||Ethos Universal Wallet||Set password for password and app; always safeguard your phone|
|Hardware Wallet||Cold||Private keys are stored on an external device, adds layer of security;||You could lose all funds if you lose the wallet and lose access to the seed code||Ledger Nano Trezor||Keep the seed code and device safe|
|Paper Wallet||Cold||Reduces the risk of hacking or phishing attacks||Spelling errors and wrong sequence when writing down the private key or lost print out or someone gaining access to the printed document could result in lost funds||Bitcoin or Ether when paper wallet is created||Keep multiple print out copies in safe keeping|
Keeping Your Wallets SafeDigital assets worth billions have been stolen (and continue to be stolen) from investors. You can take simple steps to avoid becoming another victim.
- Don’t share. It sounds obvious, since you wouldn’t share your email password or ATM pin. You may have recourse if you lose your email password or ATM pin, but if you lose your private keys to the wrong hands, you may not have any recourse. Because public blockchain information is, well, public, savvy con artists may send you genuine looking emails or texts or call you posing as an agent of the exchange you trade with. Do not enter private keys or share them over the phone.
- Maintain the integrity of the connecting device. Whether you use a hardware wallet or a desktop wallet or even access exchange-based wallets, scan your device for malware. Never click on links to get to your desired destination. Hackers used “hyphens” and “apostrophes” in the website address to fool people, they even bought the top spots on Google search to lure gullible customers. Always type the website address in a secure browser if you are using an exchange or online wallet.
- Use two-factor authentication. Always activate two-factor authentication wherever available. Two-factor authentication adds a layer of security in addition to the password. For instance, you can set two-factor authentication on exchanges and email accounts, wherever they are offered.