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What is a Blockchain Wallet & How Does it Work?

What Is a Blockchain Wallet & How Does It Work

What is ‘Blockchain Wallet’?

With the growing adoption of cryptocurrencies and other digital assets worldwide, the use of blockchain wallets is on the rise. No wonder that’s where you’ll be storing your digital assets! As a cryptocurrency investor or a blockchain enthusiast, it is important to understand what is blockchain wallet, no matter whether you are in the thick of crypto inventions or just starting. 

A blockchain wallet also called a cryptocurrency wallet, allows users to manage, track and control many different kinds of cryptocurrencies, such as Bitcoin and Ethereum. A blockchain wallet facilitates the trading and secures exchanging of digital assets, which may include cryptos, NFTs, and other kinds of tokens. Blockchain wallets are accessible through web devices and are created in a way such that the identity of the user is maintained.

True to its name, a blockchain wallet is an E-wallet that allows individuals to store and transfer cryptocurrencies or other blockchain-based assets in their portfolio.

Why is a Blockchain Wallet Important?

It is fair that crypto has taken the world by storm since Bitcoin’s first stint in 2009. Blockchain wallets are an essential component of owning cryptocurrency since they allow users to store and manage their digital assets and make it easier to trade them on exchange platforms.

Traditional banking systems are riddled with problems when it comes to digital asset transactions. They are too slow and complicated, but most importantly, data can be jeopardized, manipulated, or corrupted across the multiple systems it crosses. Blockchain wallets help minimize these risks by making the process simpler and safer.

And the numbers stand as a testament to blockchain wallets’ importance. As of February 2021, there are 68 million people with blockchain wallets worldwide. Now, let’s understand how does blockchain wallet work.

How Does Blockchain Wallet Work?

How Does Blockchain Wallet Work
Source: N26 | Blockchain Wallet

Similar to how a physical wallet would let you store your money, a blockchain wallet allows you to manage your cryptocurrencies and other blockchain-based assets. It does not hold your cryptocurrency. Crypto assets reside on the blockchain, the larger digital ledger system. A blockchain wallet is simply a way to secure the digital key that controls access to your crypto. 

There is a wide range of blockchain wallet providers. Once you decide on one of them, creating an account is fairly simplistic. After registering, you will be provided with a unique identifier similar to a bank account number for your blockchain wallet. Users can access their blockchain wallet by logging into the blockchain wallet website or downloading a mobile application. Wallets are often protected using two-factor authentication to ensure the highest level of security.

So, what do you see once you log in and check the blockchain wallet? Features differ for each blockchain wallet provider, but generally, users have access to the blockchain wallet balance and the most recent transactions. Often, there are price charts to allow you to understand the value of the digital assets in your local currency. Many blockchain wallets also have sections where you can actively trade crypto assets to house everything under one platform. 

Blockchain wallets are generally available for free use on the Internet. However, some providers charge a fee for using their blockchain wallets and subsequent features, so making an informed decision about the kind of blockchain wallet you wish to have is important. 

Blockchain Wallets Features 

  • It is fairly easy to use. While the world of cryptocurrencies and blockchain might seem daunting at first glance, blockchain wallets are quite easy to navigate, much like any other online wallet software. 
  • It is highly secure. As long as you keep your wallet key secure, the blockchain network is built so that your digital assets will be safe.
  • It allows transactions across countries. A true product of its time, blockchain wallets enable barrier-free transactions across borders in an instant.
  • It has low transaction fees. While many traditional banks are burdened with expensive fees, blockchain wallets have relatively lower fees.
  • It allows transactions across currencies. Blockchain wallets facilitate easy conversions between different currencies.


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Blockchain Wallet Types

Over the years, providers have come out with different types of blockchain wallets for different uses and situations. Let’s go through the different blockchain wallet types:

Hot Wallets and Cold Wallets

Hot wallets are online wallets through which cryptocurrencies can be transferred quickly and easily. Meanwhile, cold wallets are digital offline wallets where the transactions are signed offline and then disclosed online. They are maintained offline and not in the cloud on the Internet for the cold wallets to have high security. Coinbase, WazirX, and are examples of hot wallets, while Trezor and Ledger are cold wallets

Some other key differences are:

  • Private keys for hot wallets are stored in the cloud, while private keys for cold wallets are stored in separate hardware or a paper document.
  • Hot wallets are accessible 24/7 via a desktop or mobile device, but it leaves them vulnerable to risk. Cold wallets are relatively better protected from hacking and attacks.

Software Wallets

One of the important blockchain wallet types that investors use worldwide is software wallets. A software wallet is an application that can be downloaded on a device, such as a desktop or a mobile phone, or it could be web-based and accessed online. Copay and Jaxx are some examples of software wallets. Let’s further categorize them into desktop wallets, online wallets, and mobile wallets to understand them better:

Desktop Wallets

Desktop wallets are cold wallets in which the private keys are stored in cold servers such as your desktop. Users can unplug the wallet from the Internet, perform offline transactions, and then bring it back online. In terms of security, your desktop (or the cold server) can be used as a backup in case the main server is lost.

Important: These desktop wallets can be downloaded on any computer but can only be accessed from the system they were installed on, so ensure to keep the desktop safe!

Online Wallets

Online wallets are another one of the blockchain wallet types that run around. These hot wallets exist on the Internet and can be accessed from any device, such as a mobile phone or a desktop computer. The private keys are also stored online and are managed by a third party. 

Mobile Wallets

Mobile wallets have many similarities with online wallets, except that they are only built for mobile phone use and accessibility. They have a user-friendly interface that facilitates transactions. 

Hardware Wallets

Hardware wallets are cold storage devices like a USB that store the user’s private key in a hardware device. Very similar to portable devices that can be plugged into the computer, hardware wallets are less vulnerable to hacking or attacks. Ledger, Trezor, and KeepKey are some of the top hardware wallets on the market.

Paper Wallets

Paper wallets have an offline process for storing and managing cryptocurrencies. This type of blockchain wallet is a printed paper that has private and public keys accessible through a scannable QR code. It generally works well with a software wallet to transfer funds from the software wallet to the public address on your paper wallet. Bitcoin Paper Wallet and MyEtherWallet are two widely used paper wallets.

How to Use a Blockchain Wallet?

How to Use a Blockchain Wallet
Source: Mobile App Daily | How does blockchain wallet work?

After creating your wallet, depending on the type, you can log into it and check your blockchain wallet balance. Users can transfer their crypto assets from the trading platform through which they bought them to their blockchain wallets. For example, If you bought x amount of Bitcoin on Coinbase, you will be prompted to provide your blockchain wallet address and the amount you want to transfer to the wallet. 

As we discussed, blockchain wallets often also have the feature of converting your crypto assets to the local currency of your choice. 


And that’s all you need to know about how does blockchain wallet work! They’re quite easy to understand and use and essential if you are a crypto investor in the modern age. Hopefully, we were able to answer your question of ‘what is blockchain wallet?’ and that you’re ready to dive headfirst into the emerging world of crypto and blockchain. 

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