Bonjour, George
How do crypto wallets work?
Do I need one?
Do I need more than one?
You need a wallet for your money, right?
Not in crypto.
That’s one of the weird things about blockchain: because the chain itself is a public ledger of every transaction, all you need is a wallet address (or “public key”). You don’t need a physical or software wallet at all.
Confused? Not surprised.
So blockchain is a great big ledger, right? Every transaction – every coin or token mined, staked, sent, received, generated, burned or manhandled in any other way – appears on that great big chain of data, confirmed by whatever method the particular chain uses.
And all those coins or tokens are held in what normal people call wallets. But in reality, those wallets don’t need to exist. They can just be addresses, like empty lots in a housing development.
Still confused? OK.
Let’s go with Bitcoin as the example, since it’s the one everyone knows. When you create a wallet on Bitcoin’s blockchain (we won’t go into how), you get two keys: a public key and a private key.
The public key is what people call your “wallet address” – that great big list of letters and numbers that uniquely identifies a place to store coins for use. It might look like this:
3AE1YL6dWLXkbpohtejfGjoQZswfsBkjCc
The private key is the one you keep private (duh). You use it for personal access to that wallet address – to send coins, to sign messages, to import the details into a software or hardware wallet, that sort of thing. It’s like the password for the public key. It looks similar to the public key:
p2pkh:L3cpWBBV7ndsjkARgG8iWxf6ZrKZGsCkmKZGW242c24W6UuJwvrZ
(And no, those two keys aren’t a matched pair. I’m not thatstupid.)
Now you get someone to send you some coins. They send it to your public key – the “wallet address” – and it arrives there. The transaction is confirmed on the blockchain to prove it. Those coins are now in your wallet.
Thing is, you don’t need an actual wallet to confirm that. You can check the coins arrived on a blockchain explorer.
And you don’t even need a wallet to send coins to someone else: there are websites that let you do one-off transactions like that using your public/private key combo. It’s like having mail delivered to an empty lot… it just sits there until you build the house or pop over to pick it up.
All a wallet does is gather information from the chain, show it in a friendly way and give you tools to create new addresses, send and receive, sign messages and so on.
Your public/private key combo is what crypto people call a “paper wallet”: you’ve got your keys written down on a bit of paper so they don’t appear anywhere online and can’t be hacked. You use them only when you need to – and, if you’re really paranoid about security – you move any remaining coins to a new paper address after use, burning the old one and never touching it again.
Yeah, that’s a bit extreme. But hey, Big Data, right?
So why would you want a wallet? And what types are there?
You want a wallet because it’s a pain in the ass having to do individual transactions through websites. It’s a hell of a lot more secure to keep your coins (or at least a local record of them) on your own device, too, unless you’re doing that whole Big Data paranoia thing.
And since most crypto systems recommend using a new address for every transactions, it’s sure as hell easier to have one wallet that remembers everything and keeps all your funds in one place!
Crypto wallets come in three types (plus the paper ones, mentioned above): software, hardware and other people’s.
A software wallet is a program that holds one or more crypto assets and can do stuff like generating new addresses, sending and receiving coins or tokens, plus whatever other functionality is built in. Single-coin wallets are less popular than multi-coin wallets for obvious reasons, though you might not have a choice: nobody has a wallet that holds everything yet.
A hardware wallet is like a USB key: you plug it into your device, get through the built-in security (passwords, PINs and so on), then use it as a normal software wallet. The advantage is that it can’t be hacked on your device because it’s not connected to anything, except when it’s plugged in – and even then, most work offline so you can unplug the wallet before going back online to complete transactions. Very secure.
Other people’s wallets are “your” wallet on websites. You know, the ones in your exchange accounts, on faucet sites, on mining sites and on all those fake “earn 10% per day” sites that will disappear in a couple of days and take your money with them.
For obvious reasons, standard crypto advice is to keep your coins and tokens in your own wallets unless you’re doing something with them. Anything you store in an exchange, a faucet, a mining site or anywhere else is beyond your control – unless you have the private keys.
So the short answer is yes, you do need wallets: either one for each coin or a multi-coin wallet that holds all your assets.
– George