Wallets explained - Part 1
Updated: May 30, 2021
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What are wallets? Are containers of keys to access specific addresses within a blockchain. Each cryptocoin lives inside the blockchain where it was created (in a specific address), and it never leaves that place. Then, when you “hold” crypto in your wallet, you actually have a key to access the address where the crypto is stored.
What type of wallets exist? Basically, there are 2 kinds: hot and cold. In a few words, hot wallets are software. They could be a website or an app on your phone, and these are always connected to the internet. Some examples are the free wallets offered by exchange websites like Coinbase and Binance.On the other hand, cold wallet (or hardware wallets) are not connected to the internet, therefore, are less susceptible of being hacked. Some examples are the brands Ledger, Shift Crypto, and Trezor.
How wallets works? As mentioned, cryptocurrencies live inside the blockchain where they are created. The wallets contain a small program that connects them to the crypto blockchain.Imagine you have three different kinds of cryptocurrency: Bitcoin (BTC/XTC), Ethereum (ETH) and Tether (USDT). The wallets contain a program that allows the connection between the wallet and the different blockchain that harbours each of your Bitcoin, Ethereum and Tether. Each crypto uses their own small program.
How to choose a wallet? Between hot and cold: even though hot wallets are tempting because they can be free, cold wallets are much safer. Because this is an investment that ultimately translate into money, the safer option seems best.Between different cold wallets: not all wallets are compatible with all crypto. For example, Cardano (ADA) is not supported by Trezor One, but it is by Trezor T, and the lesser known Filecoin (FIL) is not supported by Ledger. Therefore, you should research if the brand/model of wallet you will purchase can support the crypto you have or wish to have.
If the crypto are in the blockchain, then what’s inside the wallet? The access key to the different addresses inside the blockchain where your crypto are located. The wallet stores the program which gives you access to the addresses of each of the crypto you own. The wallet doesn’t hold the crypto itself. The crypto itself lives inside the blockchain, and the blockchain lives inside a distributed computer network (think in something similar to the cloud).
The wallet resembles more a keychain than an actual wallet. When you have a wallet, you have a “keychain” with the keys to access each one of the coins you own. As a summary, you need a wallet to manage your crypto.