What is a Web3/Crypto Wallet?

At the end of this lesson you will be able to understand what a Web3 wallet is and differentiate the types of wallets that are available.
July 5, 2022

What is a Web3/Crypto Wallet?

Web3 wallets act as the gateway to Cryptocurrencies, Non-Fungible Tokens (NFTs), Decentralized-Finance (Defi), create on-chain identity, collaborate with communities and other decentralized applications (Dapps).

Wallets don’t actually store the cryptocurrency, but they store the information required for access to your fund.

Wallet apps are user interfaces that allow you to create, store, and manage cryptographic keys without having technical skills or knowledge.

At the end of this lesson you will be able to understand what a Web3 wallet is and differentiate the types of wallets that are available.
Wallets consist of 3 main components.

1. a public wallet address - This is OKAY to share (example 0xB1B10c54GE06a474731aBa36Bd395966389a0d6d)

2. a secret phrase - It is called secret for a reason - ONLY for YOU 

3. a private cryptographic key - It is called private for a reason - ONLY for YOU

NOTE: Do not give your secret phrase or private keys to anyone, and under no circumstances. Once shared, you are giving out your access to funds and assets to a third party. Anyone who asks you to 

The transaction history and all assets you have inside your wallet can be seen by anyone who knows your public address. Anyone is able to send things to your wallet without your permission, similar to your email address getting spam emails.

A private key or secret phrase grants control over all assets of a wallet.

An important fact to know is that the money and assets do not actually sit “inside” of your wallet. Rather, they are simply a record of ownership associated with your wallet’s address on a public, decentralized ledger.

Types of the wallets

There are several types of wallets In Web3 space. Each has its pros & cons use cases that may be useful depending on your intention of managing your data and funds. It’s best to try and see which type of wallet works for you.  

Hot Wallets

Hot wallets are software wallets because they are on devices that have access to the internet and cryptocurrency network. These wallets are the most convenient, due to their ability to store, send, receive, and view tokens. Hot wallets are considered the highest in utility when it comes to Web3 wallets.

Since hot wallets are connected to the web, they’re prone to more hacks compared to cold wallets. 

Desktop Wallets

Desktop wallets are applications downloaded to the laptop or desktop. That means the transaction is executed locally in the machine. They are considered the safest type of hot wallets available.

Web Wallets

Web wallets allow people to interact via a browser extension interface. It contains the exact same features as desktop wallets, using the same blockchains and block explorer to search blocks and transactions. 

Mobile Wallets

These are very similar and work much like desktop wallets, except are designed specifically as mobile apps for smartphones. 

This gives users access convenient access to their funds at the palm of their hands. Mobile wallets tend to be more primitive compared to desktop apps due to limited space and the use case for simplicity.

Cold Wallets

Cold wallets aim to be a safer alternative to storing cryptocurrencies because of no connection to the internet. The keys are stored offline, on a physical medium. This is known as cold storage, which is resistant to hackers. This option is specifically useful for long-term investors.

Hardware Wallets

Hardware wallets are physical electronic devices (often looking like a USB device) that use a Random number generator (RNG) to populate public and private keys. This is considered one of the best and safest alternatives because of its capacity to hold public and private keys in the device without any connection to the internet. The access to your cryptocurrencies is offline. Using hardware wallets for cold storage empowers users to have more security and prevents hackers from accessing their funds.

Hardware wallets are most suitable for long-term investing and storage because they tend to be less accessible. Its main benefit and use case is ensuring a high amount of security for large sums of money not allocated for constant usage.

Paper Wallets

A paper wallet is a piece of paper consisting of which a blockchain address and private key are physically printed out. These keys are printed out as QR codes. Users can transact funds by scanning QR codes.

Usage for paper wallets isn’t commonly used and is often discouraged due to its flaws. One of these flaws is that paper wallets can’t send partial funds, and can only send the entire balance all at once.

Making a transaction

Every time you make a transaction or do something on the blockchain, it is required to “sign” a message that verifies you own the wallet’s key.

If your wallet's private key and secret phrase are lost, there's no way of recovering access to the wallet. There is not an option to click a "forgot password" button, and additionally, there's no 2-factor authentication. 

The private key and/or secret phrase must be backed up. There are multiple options for doing this, and each method gives you a different level of protection. 

Here are a few examples:

  • iCloud Backup feature
  • Password Manager 
  • Written on a piece of paper
  • Stamped onto a piece of metal

Interoperability

One of the key differences between the traditional internet and crypto is that you can take your wallet's private key or secret phrase and use them with a totally different wallet application.

If your wallet App stops working, or you find a better one and decide to change it, then you can easily take your credentials and use them on the new app. You can have your wallet (containing all the assets) seamlessly in two places or apps at once. This is called interoperability, and it means that data and software made by different organizations can work together.

In the Web3 world, your identities and stored data follow you.

Summary

Different types of Web3 wallets are continuously being developed and improved. Very important  is how you store your seed phrase. Store it in a safe, a USB with a pin, or even a laptop not connected to the internet. There are different ways to store your seed phrase, but the main idea is to keep it offline, not to be hacked.

The most critical rule is to:  Never give out your seed phrase!

Sources:
  1. https://learn.rainbow.me/what-is-a-cryptoweb3-wallet-actually 
  2. https://www.alchemy.com/web3-wallets-overview

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