Crypto Wallet 101
August 3, 2018
I was nerding out with my brother Benson (super tech nerd working as the Operations Engineer at Mozilla FireFox) last night and we were having a discussion about blockchain wallets and how to pre-launch one without a blockchain. 10 minutes into my creative rant on how to build traction for Quantaloop, he stopped me and asked ‘What do you think a wallet is?’. As simple as that sounds, I took a second before answer, ‘It’s a place that stores your address to the location on the blockchain that has your information of how much crypto you have’… then I hesitated. Maybe I don’t know as much I should about wallets, so today I made is a goal to REALLY understand it… as one should do when designing / innovating for it.
So what is a cryptocurrency wallet? A cryptocurrency wallet (digital) is a software program that stores private and public keys and interacts with various blocks to enable users to send and receive digital currency and monitor their balance. So to repeat, a cryptocurrency wallet is a digital wallet that you can use to store, send and receive various cryptocurrencies but it doesn’t exactly “store” your money as a real-world wallet does. Instead, it saves your public and private keys which in turn helps you send and receive crypto money.
What are public and private keys? “Let’s think of a real world situation before we understand what public and private keys are. Imagine a vending machine. Can anyone and put their money inside the machine right? But, they can’t take out the money because they don’t have the key, they can only put money in the machine. The only person who can take out the money is the owner of the machine who has the key. In this example, the vending machine is the public address which anyone uses to send money to you. You are the machine owner, and the key that he is carrying is your private key. Using this private key only you can access your money and do what you please with it. The public key is the address that anyone can use to send you the money, while the private key is what you will use to send money to anyone else. Remember, ONLY you should know what your private key is, otherwise anyone can use your wallet to send your money to any other addresses. Under no circumstances should you ever lose your private key. Let’s put this in super simple terms. If you lose your private key, then you are SCREWED (yes, uppercase has been used to emphasize the gravity of the situation).” And this is very common so it is important to take measures not to loose your private keys or the money will forever be locked in the vending machine.
A transaction is a transfer of value between crypto wallets is something that gets included in the info that is stored on the blockchain. Wallets keep a secret piece of data called a private key or seed, which is used to sign / authorize transactions, that provides mathematical proof that they have come from the owner of the wallet which gives it the green-light.
What is a hot wallet? A hot wallet refers to a crypto wallet that is online and connected in some way to the Internet. It is a term that refers to bitcoins that are not being kept in cold storage. Cryptocurrency-related services and exchanges that are able to pay out withdrawals instantly can be said to be paying them from a “hot wallet”. Pros of hot storage include quick to access funds, a wide number of options, and support for different devices. User-friendly UIs make sending and receiving simple. Cons of hot storage: Exposed to cybercrime. Sophisticated hackers, ransomware, and other malicious actors are a constant threat. Damaging the device could destroy the wallet. Without carefully backing up private keys, and seed words you could permanently lose your cryptocurrency investment. There are 2 kinds of hot wallets: Online Wallets aka Cloud Wallet and Desktop/Mobile Wallets.
What is a cold wallet? A cold wallet, also known as cold storage or a hardware wallet in the context of crypto refers to keeping a reserve of cryptocurrency tokens kept offline. Methods of cold storage include keeping a paper wallet, USB drive or other data storage medium in a safe place (e.g. safe deposit box, safe) which we will talk about below.
What is a paper wallet? A paper wallet is a document containing all of the data necessary to generate any number of Bitcoin private keys, forming a wallet of keys. However, people often use the term to mean any way of storing cryptocurrencies offline as a physical document. This is a great tutorial article on how to create a paper wallet: Also this article on the same site is great reference.
What traits should you look for in a crytocurrency wallet? This seemingly easy answer, unfortunately, does not have a satisfying answer as sometimes you must sacrifice one for the other. For example, convenience may come at the cost of security; additional features may come at the cost of a steeper learning curve. Here are a list of traits to look for from Blockgeeks in no particular order:
1. Cost. Is it free? What are the drawbacks of using this wallet?
2. Security. Does the company have a track record of security excellence?
3. Mobility. Is it easy to keep and difficult to lose? Is it accessible anytime, anywhere?
4. User-friendliness. Is the wallet UI intuitively designed? Can I store a range of altcoins?
5. Convenience. Am I able to make a fast purchase when the time calls for it?
6. Style. Do I have a weakness for cool tech gadgets?
So for simplicity sake, let’s do what every article on hardware wallets do online by comparing 2 very popular options, the Trezor and the Ledger. By looks the Trezor looks a bit oldschool, which the Ledger Nano S looks very sleekly modern. Almost can confuse it to be from Microsoft or Apple even in design (especially the packaging). The coins supported by each are quite an extensive list but it seems like the Ledger Nano S supports more coins than the Trezor, the Nano S doesn’t natively support ERC-20 tokens so if you sent some tokens there, they can’t display in your operations and balance. It can still hold it though I believe if you use your Nano S with MyEtherWallet instead of the Ledger Wallet Ethereum Chrome application. Here is the link to setup and use MyEtherWallet from the ledger website.
Pros and Cons: A quick comparison of the strengths and weaknesses of each device.
Trezor: Customizable splash screen, Private Keys never exposed, Restoring easier since you can use a computer keyboard to do so (which is also less secure, but they have good methods to still make it very secure), supports most major coins. See list here:
Ledger Nano S: Looks great, small, handy dandy, Supports more coins then the trezor, Private Keys never exposed, Restoring is pure pain. You have to enter each digit of each word via the two buttons the device has. This will take 1h at least. But then, how often do you have to do that? It is the most secure way, too.
Both are very secure devices, but also need software installed on your computer. Going to a friend and quickly sending some coins is not possible, unless he installs the software. Something to be aware of is that in on the long run and a company goes belly up, the apps disappear, you are a little screwed so you might just need to keep a paperwallet SOMEWHERE… but not sure if this defeats the whole point.
As final note on wallets, while there is no really such a thing as an offline wallets or 100% safe places since my account is stored in the blockchain, taken extra measures never hurts to secure your crypto and for me, maybe it’s my trust issues, but I wouldn’t just trust one source to hold my crypto, but this just lowers my security overall to have a back-up of a back-up. Regardless, the conclusion is if you hold cryptocurrency, it is just as good as money so take the time to learn how to protect your cryptocurrency just as you protect your money.
Src: Wiki, Blockgeeks.com, Medium, CoinDesk