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What is Crypto Wallet and What are it’s Types?

What is Crypto Wallet and What are it’s Types?

Wallet is a service that allows cryptocurrency users to store and retrieve their digital assets....

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What is a wallet in the cryptocurrency industry? And what role does it play? As bankrate.com puts it, wallet is a service that allows cryptocurrency users to store and retrieve their digital assets. Similar to your personal wallets or bank lockers (hardware devices) where you keep your cash, credit cards, and jewelry among other sensitive items.

In the crypto world, there are primarily two types of wallets – Hot wallets and cold wallets. Hot wallets are those that are connected online or in other words, to the internet like software wallets. Cold wallets are those that are ‘disconnected’ from the internet which is typically hardware devices. You might wonder why someone would need a hardware or physical device to store digital assets? Keep reading.

What is a Crypto Wallet?

What is crypto wallet is an essential tool for managing and using cryptocurrency. They provide a way for users to access and interact with the blockchain, the distributed ledger that powers cryptocurrency transactions. Cryptocurrency wallets store two important pieces of information: public keys, which are used to identify a user’s address on the blockchain and receive cryptocurrency, and private keys, which are used to sign and broadcast transactions to the blockchain.

Cryptocurrency wallets can take many different forms, including software wallets that are installed on a user’s computer or mobile device, and hardware wallets that are stored on a separate physical device, such as a USB drive. Some wallets are designed to hold a single cryptocurrency, while others support multiple cryptocurrencies.

One important thing to note when you think ‘what is crypto wallet?’ is that they do not actually store cryptocurrency in the same way that a physical wallet stores cash. Instead, they read the public ledger to show users the balances in their addresses, and they use the private keys to enable users to sign and send transactions on the blockchain. This means that if you lose your private key, you may lose access to your cryptocurrency permanently.

In addition to basic features like sending and receiving cryptocurrency, the best crypto wallets offer additional functionality. For example, some wallets allow users to buy and sell cryptocurrency, or to interact with decentralized applications (dApps).

How Do Cryptocurrency Wallets Work?

Cryptocurrency wallets work by storing users’ private and public keys, which are used to identify the user’s address on the blockchain and receive cryptocurrency, and to sign and broadcast transactions, respectively.

When a user wants to send cryptocurrency to another person, they use their private key to sign a transaction and send it to the blockchain network. The transaction includes the amount of cryptocurrency being sent, the address of the recipient, and the address of the sender. The network then verifies the transaction and, if it is valid, adds it to the blockchain and updates the balances of the sender and the recipient.

Users can view the balance in their cryptocurrency wallets by accessing the public ledger, which is a record of all transactions on the blockchain. The wallet uses the user’s public key to look up the balance in the ledger and display it to the user.

It’s important to note that while crypto wallets provide a convenient interface for interacting with the blockchain and managing cryptocurrency, they do not actually store cryptocurrency in the same way that physical wallets store cash. Instead, they simply provide access to the user’s keys and the ability to read and update the public ledger.

Why are Crypto Wallets Important?

Now we know ‘what is crypto wallet?’ But why are they important? Crypto wallets are important because they provide a secure method for storing cryptocurrency. When you store your cryptocurrency on an exchange, you are relying on the exchange to keep it safe. However, exchanges can be vulnerable to hacking and other security breaches, and if your crypto is stolen or lost, you may have no way to recover it.

On the other hand, when you store your crypto in a wallet, you retain ownership of your private keys and have full control over your finances. This is particularly important for larger amounts of cryptocurrency, as it allows you to keep your funds safe and secure.

😯Excited to learn the basic and advanced concepts of crypto wallets? Read this detailed guide on How to Keep Crypto Safe?

What are the Different Types of Crypto Wallets?

Cold WalletHot Wallet
Cold wallets are kept offlineHot wallets are connected to the internet
Best suited to those storing a large amount of crypto over a large period of timeBest suited to beginners or regular traders who need to make quick, online payments
Reduced threat from hacking and online attacksVulnerable to hacking and online threats
Less convenient and more expensiveEasy and convenient to use
Examples: Paper wallets and hardware walletsExamples: Web-based wallets, mobile wallets, and desktop wallets

1. Cold Wallet

Hardware wallets are considered the safest among crypto wallets. They offer cold storage for your crypto assets since they are disconnected from the internet. ‘Ledger’ and ‘Trezor’ are the most widely used hardware wallets and they look similar to USB drives. You would connect your hardware wallets to the internet to transfer funds in and out of the wallet. Storage is offline but the data gets synced with the underlying Web 3.0 technologies like blockchain when you connect online to make transfers. For the most part, your digital assets will remain offline and you will not have to worry about online hacks and rug pulls (where the custodian runs away with your money).

2. Hot Wallet

Hot wallets include your wallets on centralized and/or decentralized service providers. Wallets on crypto exchanges like Binance and Coinbase are examples of centralized hot wallets. Your Demat account that holds your equity stocks can be considered as a centralized hot wallet. Further, wallets such as Metamask, Trust Wallet, and Phantom are examples of decentralized wallet services. 

One of the core objectives of cryptocurrency and Web 3.0, in general, is to enable people to be their own banks without relying on third parties. No third party should be bothered about what you do with your funds as long as they are used for legitimate purposes. Those who are averse to centralized services (and cold wallets due to their disadvantages) have a good alternative in decentralized hot wallets.

Custodial WalletsNon-Custodial Wallets
A custodian of a third party has control of the private keys and fundsUsers have complete control of their private keys and their funds
Less secure as funds are stored online and are therefore vulnerable to hackingMore secure as users hold their private keys offline
Less personal responsibility but requires trust in the custodian that holds user fundsUsers are wholly responsible for keeping their funds and private keys secure
Backups in place so if users lose their private keys, they can easily regain access to their walletIf users lose their private keys or recovery phrases, then they lose access to their funds
Lengthy KYC and AML proceduresNo KYC or AML procedure
More user-friendlyLess user-friendly
Best suited to beginners just starting outBest suited to those who want to retain full control of their funds

1. Custodial Wallets

Custodial crypto wallets, which are commonly provided by cryptocurrency exchanges, are known for their ease of use and are popular with both novice and experienced traders. They differ from non-custodial wallets in that the user does not have full control over their tokens and the private keys needed to make transactions are held only by the exchange. 

This means that the user must trust the exchange to handle their tokens securely and implement measures such as two-factor authentication and biometric authentication to prevent unauthorized access. Exchanges may also transfer a portion of the funds to a cold wallet to protect them from online attacks. However, users must set up these security measures before being able to make transactions.

2. Non-Custodial Wallets

Non-custodial crypto wallets allow users to retain full control over their funds because the private key is stored locally on their devices. When setting up a non-custodial crypto wallet, the user is given a list of 12 randomly generated words, known as a recovery phrase or seed phrase, which can be used to generate the public and private keys for the wallet. 

It is important to securely store this phrase as anyone with access to it can gain control of the funds in the wallet. If the phrase is lost, it may be difficult or impossible to recover the funds. Hardware wallets are a type of non-custodial wallet that store the private keys on the device itself, while software-based non-custodial wallets also give users full control over their keys and funds. However, this also means that users must take responsibility for the security of their passwords and recovery phrases.

Additional Types of Crypto Wallets

1. Multi-Signature Wallets

Multisignature (or multisig) crypto wallets are a type of cryptocurrency wallet that requires more than one private key to authorize a transaction. This means that multiple people, or multiple devices, must sign off on a transaction before it can be completed. 

For individuals, using a multisig crypto wallet can provide an extra layer of security. If a user loses one of their private keys, there will still be other keys that can sign transactions, so the user will not lose access to their entire wallet. 

Multisig crypto wallets can also be useful for organizations such as hedge funds, exchanges, and corporations. By requiring multiple keys to sign off on transactions, it becomes much more difficult for any one individual to make unauthorized transactions. This can help prevent fraud and the misuse of funds.

2.NFT Wallets

An NFT crypto wallet is a secure place to store non-fungible tokens (NFTs). There are two main types of NFT wallets: hardware wallets and software-based wallets. When choosing an NFT wallet, you should consider factors such as compatibility with NFT marketplaces, strong security measures, a user-friendly interface, availability on multiple devices, and cross-chain compatibility. 

Hardware crypto wallets, such as those made by Ledger and Trezor, are popular options, but they may not natively support NFTs, so you may need to connect them to a hot wallet that can store and manage NFTs.

3. DeFi Wallets

DeFi crypto wallets are cryptocurrency wallets that are specifically designed for use in decentralized finance (DeFi). DeFi is a sector of the cryptocurrency industry that focuses on financial products such as lending, saving, and more, which do not rely on a central broker. 

DeFi crypto wallets allow users to interact with DeFi products and manage their cryptocurrency holdings, typically on a mobile app or browser extension. These wallets may have features such as support for a wide range of tokens and blockchains, the ability to view and manage non-fungible tokens (NFTs), and options for earning passive income through staking cryptocurrencies. Some DeFi wallets may also have additional security features, such as two-factor authentication, to protect user funds.

List of Best Hot Crypto Wallets You Should Know

1. Atomic Wallet

Atomic Wallet is one of the best crypto wallets that allow users to store over 1,400 cryptocurrencies and offers options for buying, exchanging, and staking digital assets directly from the wallet. 

It does not offer the option of connecting holdings to cold storage, but it does have a paid membership program that allows users to earn rewards for completing transactions through the platform. However, it does not have a browser extension, which can be useful for interacting with decentralized applications. Atomic Wallet supports a wide range of assets and has staking and DeFi support.

2. Coinbase Wallet

Coinbase Wallet is a crypto wallet that allows users to store their own cryptocurrency rather than keeping it with Coinbase, the largest U.S.-based crypto exchange. It is a separate product from Coinbase and is designed to be user-friendly for those who are new to non-custodial wallets. 

The Coinbase Wallet has mobile and browser-based connections to decentralized applications, but does not have a desktop app. However, it does have a browser extension that can connect to the Ledger hardware wallet. Coinbase Wallet supports thousands of assets and has staking and DeFi support. It also allows users to convert their holdings to cold storage.

3. Crypto.com DeFi Wallet

Crypto.com DeFi Wallet is one of the best crypto wallets created by a company known for its crypto exchanges. It is specifically designed for use in decentralized finance (DeFi) and allows users to interact with DeFi products on a mobile app or browser extension and manage their crypto holdings. It also has a desktop app that integrates with Ledger hardware wallets and offers two-factor authentication for added security. 

Some competitors do not offer 2FA, arguing that it can increase the risk of losing crypto and is made unnecessary by certain aspects of wallet technology. Crypto.com DeFi Wallet supports more than 1,000 assets and has staking and DeFi support. It also allows users to convert their holdings to cold storage on the desktop app.

4. Electrum

Electrum is a crypto wallet that is focused on security and transparency. It is a free, open-source product that only supports Bitcoin and has a desktop app. It offers two-factor authentication, straightforward connections to cold storage, and support for multi signature transactions, which require the approval of multiple users. 

Electrum does not offer support for other cryptocurrencies or staking and DeFi options, but it is a good option for Bitcoin users looking for advanced security features. It is worth noting that if you are only interested in storing a single cryptocurrency, it can be helpful to refer to the official website of that cryptocurrency for recommendations on wallets.

5. Exodus

Exodus is a free crypto wallet that offers a range of software tools including a mobile app, desktop app, and browser extension. It allows users to buy, trade, or stake cryptocurrency directly from their wallets and has an integration with the Trezor cold wallet to facilitate the transfer of crypto from hot to cold storage. 

Exodus has a large library of educational resources for those learning about cryptocurrency and supports over 260 cryptocurrencies, including many popular assets. However, this number is smaller than some of its competitors that claim to support tens of thousands of different cryptocurrencies. Exodus supports staking and DeFi options and allows users to convert their holdings to cold storage.

6. Guarda

Guarda is a free, all-in-one crypto wallet that can be accessed via a mobile app, desktop app, or browser extension. It is a versatile wallet that allows users to manage their digital assets from multiple devices and platforms. Guarda claims to support more than 400,000 different digital assets, including many popular cryptocurrencies. This wide range of support makes it a good choice for users who want to store and manage a diverse portfolio of digital assets. 

Guarda also has an integration with the Ledger hardware wallet, which allows users to easily move their crypto into cold storage for added security. In addition, Guarda offers staking programs that allow users to earn passive income by holding their digital assets in the wallet. Additionally, Guarda has support for DeFi options, which allows users to access decentralized finance products and services within the wallet.

7. MetaMask

MetaMask is a free and open-source crypto wallet that is specifically designed for use with the Ethereum blockchain. It can store any digital asset that is built on Ethereum, which includes more than 700,000 different tokens. MetaMask is particularly useful for users who regularly interact with decentralized applications (dApps) on the Ethereum blockchain, as it allows users to easily connect to these applications and make crypto transactions. 

MetaMask has both mobile and browser-based wallets, but it does not have a desktop app. While it does not directly support staking within the app, users can access staking options through connected apps that integrate with MetaMask. Overall, MetaMask is a good choice for users who want to interact with dApps on the Ethereum blockchain and need a convenient and secure way to manage their digital assets.

8. Trust Wallet

Trust Wallet is a crypto wallet that allows users to store and manage a variety of digital assets. It is the official wallet of Binance, a major international digital asset exchange, and provides users with the ability to buy, sell, and trade directly from their wallet. 

Trust Wallet claims to support more than a million different types of digital assets, but does not appear to have a built-in feature for transferring assets from hot to cold storage. Despite this, Trust Wallet is fully open-source, which is a feature shared by only a few of its competitors.

List of Best Cold Crypto Wallets You Should Know

1. Ledger

Ledger is a well-known brand in the world of cryptocurrency wallets, counted among the best crypto wallets. It offers a range of hardware wallets that range in price from around $79 to $149. Ledger devices can be used in combination with a variety of software wallets, including Crypto.com and Guarda. Ledger has a mobile app and a desktop app, and it is also developing a browser extension. The company offers two-factor authentication and has a variety of educational resources for users. Ledger supports over 5,500 different cryptocurrencies and allows users to transfer their assets from cold storage to online storage. It also offers support for staking and decentralized finance (DeFi) transactions.

2. SafePal

SafePal is a unique type of cryptocurrency wallet that combines the security of hardware storage with the convenience of online software. The hardware device, which costs $50, stores users’ cryptocurrency offline, protecting it from potential online threats such as hacking or phishing attacks. In addition to the hardware device, SafePal offers a mobile app and browser extension that allow users to easily buy, sell, and trade their digital assets. The company claims to support more than 30,000 different types of cryptocurrency, making it one of the most comprehensive hardware wallets available. SafePal also offers support for staking and decentralized finance (DeFi) activities, making it a versatile option for users looking to engage in a variety of crypto-related activities.

3. Trezor

Trezor is a hardware wallet company that offers high-end storage options for cryptocurrency; it is definitely among the best crypto wallets. While its entry-level model is priced at around $70, Trezor also offers a more expensive model with additional features such as a touch screen and additional storage options. This model is currently priced at $219. In addition to hardware storage, Trezor offers a range of software products, including integrations with other crypto firms such as Exodus, as well as built-in services like staking and the ability to purchase cryptocurrency directly through the Trezor platform. Trezor has a desktop offering, but does not have a mobile app. It supports over 1,800 different assets and offers staking and DeFi support.

Conclusion

Best crypto wallet service providers are constantly seeking to improve their products and stay at the forefront of developments in the Web 3.0 space. One of the areas where they are focusing their efforts is on making wallets more interoperable, allowing users to easily move their funds between different wallets and platforms. Some wallet providers are even exploring the possibility of offering password management services for Web 3.0 applications, as reported in this CoinDesk article. Despite these advancements, it is still hoped that a fully decentralized, self-custodial, and highly secure wallet that is easy to use will be developed in the near future. Such a wallet would offer users full control over their funds and eliminate the need for third-party custodians, while also providing the highest levels of security and usability. It is likely that the development of these types of wallets will be a key focus for wallet service providers in the coming years as the Web 3.0 space continues to evolve.

Frequently Asked Questions (FAQs)

1. Which Wallets Should you Consider for Crypto?

When considering which wallets to use for cryptocurrency, it is important to carefully research the available options and choose a wallet that meets your specific needs and security requirements. Some factors to consider when selecting the best crypto wallet include the type of wallet (e.g. hardware, software, or paper), the security measures in place to protect your funds, the number and types of assets supported, and the convenience and usability of the wallet.

2. Which Wallets are Considered Safe? 

Generally speaking, hardware wallets and paper wallets are considered to be the safest options for storing cryptocurrency. These types of wallets offer the highest levels of security by storing users’ private keys offline, where they are less vulnerable to hacking or other online threats.

3. Is having a Crypto Wallet Worth it?

Having a cryptocurrency wallet is generally considered to be worth it for anyone who is planning to buy, sell, or hold onto digital assets for the long term. The best crypto wallet provides a secure and convenient way to store and manage your cryptocurrency, allowing you to easily access and use your funds as needed.

4. What does a Crypto Wallet do?

A cryptocurrency wallet is a digital software program or hardware device that stores users’ private keys and allows them to securely manage and transact with their digital assets. The best crypto wallet typically provides a secure way to store users’ private keys, as well as a user-friendly interface for sending and receiving cryptocurrency, viewing account balances, and conducting other transactions.

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Opinions expressed in this publication are those of the author(s). They do not necessarily purport to reflect the opinions or views of Shardeum foundation.

About the Author : Shriraam Sekar is a crypto writer/marketer involved in the space since 2019. He covers Layer 1s, DeFi, NFTs, Metaverse, GameFi, SocialFi, and crypto regulations. Follow him on Twitter for collaboration related to crypto/Web 3.0

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