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DeFiSecurityBasics

What’s a Crypto Wallet?

Feb 14, 2023
5m
Yavor Kaludov Ariel Monjes

As the owner of a cryptocurrency, you’re solely responsible for its secure storage when using a non-custodial cryptocurrency wallet – and only you hold the keys. 

Discover how crypto wallets work, which types of wallets exist, and how to make more educated financial decisions.

How Does a Crypto Wallet Work?

Unlike the wallet in your pocket, crypto wallets don’t actually store any currencies. Crypto wallets store and manage public and private keys (more on that below). They’re used for authentication, purchasing cryptocurrencies, and accessing funds across one or multiple blockchain addresses.  

Public vs. Private Keys

Public-private key encryption is how all crypto transactions are secured. Think of public keys as “where” crypto funds are stored on the blockchain, and private keys are “what” you use to access them. 

What Are Public Keys?

A blockchain address is a cryptographically shortened version of a public key. It works similarly to a bank account number. Essentially, it's the address stored on the blockchain and associated with the funds you own. 

As each blockchain transaction occurs, the new state of the chain is recorded. Each address on that chain is then assigned its respective amount of coins. 

What Are Private Keys?

Private keys are used for encrypting and decrypting data when you’re accessing and managing the funds associated with your public keys. They’re typically large numbers that can be represented in many formats (some are easier to read by humans, others are better suited for computers). 

You only receive one private key per public key, but crypto wallets can manage multiple addresses using something called a seed phrase (recovery phrase). 

When setting up any modern wallet, you’ll be asked to write down a 12 or 24-word seed phrase (an incredibly strong password that’s virtually impossible to crack). This will be used as a master key to create and access all private keys in a wallet. 

In short: You’ve got your public key (your address on the blockchain) which you can send and receive funds from. You’ve got your private key which is the “code” you use to prove you’re the owner of the public key. With most modern wallets, you have a seed phrase that can be used to generate any number of private keys. 

What Happens If I Lose My Private Keys? 

Your seed phrase is how you recover a wallet. You can set up the same wallet on multiple devices and you’ll never lose access to your funds, even if you lose your device.

Is My Wallet Password Different from a Seed Phrase? 

When you set up a wallet on any device (e.g. laptop, phone), the wallet will also prompt you to create a simple password that you’ll use to unlock it for everyday use. This password is different from a seed phrase. It only gives you access to the software (ie. wallet interface) running on your computer. 

What If I Lose My Seed Phrase? 

If you lose your seed phrase, you’ll still be able to access your wallet with the password as long as you have your device with you. This is the best-case scenario as you’ll be able to transfer all funds from the lost wallet to a new one. If this happens, don’t wait: move your crypto to a new wallet as soon as possible – and be careful to keep your seed phrase more secure next time!

The benefits of “being your own bank” are countless, but this privilege also opens you up to more responsibility. Keeping multiple secure copies of your seed phrase is essential when using a non-custodial wallet. 

For further reading on how to stay safe in this space, check out our article on Common Scams in Crypto and How to Avoid Them

Cryptocurrency Wallet Categories

Each type of crypto wallet carries benefits and drawbacks, mainly revolving around ease of use and security. They can be divided into two main categories: custodial and non-custodial.

Custodial/Hosted Wallets

Custodial crypto wallets mean that control of your private keys is handed over to a third party. If you store your funds on a centralized exchange (like Binance or a digital banking service like Revolut), these companies will provide you with access to your funds. They have “custody” over your wallets and the cryptocurrencies held within them. 

Non-Custodial/Non-Hosted

Non-hosted crypto wallets involve zero third parties. Whichever type you choose, only you are responsible for the security of your funds. Non-custodial wallets are ideal for accessing Web3 services and participating in Decentralized Finance (DeFi) protocols. 

A Note About Hot & Cold Wallets 

Hot wallets are connected to the internet while a cold wallet remains disconnected from the web. In terms of hack prevention, being completely offline makes cold storage the obvious winner (although it’s far less convenient). Most people chose to keep large sums on cold wallets and only transfer small amounts to a hot wallet for daily use. 

Cryptocurrency Wallet Types 

There are a few main types of crypto wallets out there: 

Mobile and Desktop Wallets

These standalone applications are either installed on your mobile or desktop device. Depending on whether you choose to permanently connect the device to the internet or not, it can be used for both hot and cold storage. These wallet types – and the systems they run on – need to be kept up to date. Overall, however, they provide a high level of security (especially cold wallet configurations). 

Web Wallets

Accessible on internet browsers and most often available as extensions, web wallets are the most user-friendly but least secure option. While they’re great for daily access to DeFi and Web3 services, they aren’t recommended for storing large amounts of cryptocurrency.

Hardware Wallets

These separate devices (most commonly USB sticks that plug into a computer) are considered extremely secure because they add another layer of security when authorizing transactions. When connected, the device pairs with a hot wallet (desktop app) on your computer and provides verification by using the private keys stored on the actual USB. Some also have Bluetooth capability.

A Good Wallet Makes a World of Difference

Though they’re one of the most essential tools in crypto, wallets still aren’t where they need to be. In fact, few provide users with a straightforward, secure, and customizable experience. 

This is where Sonar comes in: We’re developing our own non-custodial, multichain, Web3 wallet that’s packed with innovative features. Our goal is to make your crypto journey better – on all levels. The wallet is now in an early alpha stage and will soon be available for testing to Sonar's SGEN NFT holders.


To be among the first to take advantage of Sonar Wallet, provide us with your email using the form below and sign up for the waitlist here

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