Updated: Aug 15, 2020
Choosing the best blockchain wallet is highly dependent on what your specific needs are and your thoughts on security versus convenience or hardware vs software.
We live in a mobile, connected-everywhere world, making the crypto wallets that support mobile operating systems attractive due to their always-available convenience.
For improved security, a desktop client with a key stored elsewhere, like on paper or a USB drive, may be a better solution. Some people also opt for hardware cryptocurrency wallets.
What is a Crypto Wallet?
If you’re investing in cryptocurrency, you want to use an alternative currency for privacy or other reasons, you’ll need a place to store your money and a way to send or receive cryptocurrencies.
A crypto wallet is the answer. Crypto wallets come in many forms, including web wallets, mobile, desktop, paper, brain and hardware wallets. Some desktop wallets, called full nodes, hold a complete copy of the blockchain for the cryptocurrency. On local storage, this type of wallet has a long sync process when opened and creates a massive amount of stored data.
A slimmer version is a lite wallet, also called a simple payment verification (SPV) wallet, which relies on a full node hosted elsewhere (third party) to validate transactions on the blockchain. Lite wallets are faster and use less disk space on your local storage.
What are Crypto Wallet Keys?
A crypto wallet key is a long series of letters and numbers that unlock your wallet. In some cases, a passphrase called a seed, comprised of a long list of unrelated words, is used to unlock your crypto wallet. This type of wallet is called a hierarchical deterministic wallet, or an HD wallet.
In either case, anyone who knows or can access your private key can control the currency stored in your crypto wallet — even if they don’t have access to your computer. Only the key is needed for access. Your key is also used to generate your wallet address.
With HD wallets, multiple wallet addresses can be created. The wallet address is an ID associated with your wallet that directs payments to or from your individual wallet. The key and the wallet address are linked.
The wallet address can be shared without risking the security of your wallet — at least in regard to the key. Other risks may still exist — such as any risks stemming from someone knowing that you have a crypto wallet at all, or that a particular wallet address is yours, or that a particular payment came from or went to your crypto wallet.
What are Mnemonic (Seed) Phrase?
Blockchain technology is gaining ground as an emerging technology that will shape how societies interact across borders. One of the key underpinnings of blockchain is its cryptographic keys which makes it difficult for a third-party to gain access to blockchain assets owned by an individual. Securing blockchain assets, as well as signing transactions, are performed using a user’s private keys. Private keys, alongside public keys, are generated when accounts are created on the blockchain. This gives users their passwords and public addresses to authenticate transactions on the blockchain.
However, there is a drawback with the usability of private keys by non-tech-savvy users. They are hard to memorize for most people. The Cardano blockchain, for instance, creates public and private keys for each account that is created on the chain. Private keys are alphanumeric characters that the user is required to save for life. Losing them is equivalent to losing access to your account. This scares many new blockchain users and can be a barrier to user adoption. To make private keys user friendly, the Cardano blockchain supports the use of a Mnemonic phrase which performs the same function as private keys. Mnemonic phrases are a human-readable version of the private keys. The user can sign transactions and recover lost accounts using part of their mnemonic phrase. Mnemonic or seed phrases can range from 12 - 25 words depending on the blockchain ecosystem you are dealing with. Any app can generate its mnemonic phrase for security purposes.
The Cardano blockchain supports mnemonic keys and is generated during the account sign up. It is a 24-word pattern that best represents the private key and performs the same functions as the private keys. They are easily readable and easy to memorise as well. On the Cardano blockchain chain, mnemonic keys are generated by converting the user's private key string to an 11-bit integer to the bip-0039 English word list where the integer value maps to the word in the bip-0039 English word list with position same as the integer value. To illustrate, if an integer value is 2, it will map to the 2nd word on the bip-0039 English word list. This process of transforming the private keys to 11-bit integer and mapping it to bip-0039 English word list will generate 24-word mnemonic keys. The bip-0039 English word is made up of about 2048 random words in an array and can also be termed as seed phrase
Types of Crypto Wallets
Hot wallets. These types of wallets use keys that were created or are stored on a device that has access to the internet. Because the keys were created or are stored on a device that can be accessed remotely, a hot wallet is regarded as the least secure type of wallet, but is also the most popular due to its utility and convenience.
Cold wallets. Cold wallets use keys created on a device that has never had access to the internet. Examples of cold wallets are hardware wallets, such as a portable USB drive or smart card device, paper wallets (keys only written on paper) or brain wallets, which use a seed made of a series of words or a password that can be memorized.
Hosted wallets. These live on another server that you don’t control. Hacking can happen on any server that has network access or that can be accessed physically, but hosted wallets create a more attractive target than a computer in your home that holds your crypto wallet due to the number of wallets on the server. You can think of a hosted wallet as being similar to a bank — a third party holding your money on your behalf — but without the FDIC insurance or other consumer protections provided by banks.
Decentralized wallets. A decentralized wallet means that only you hold the keys to your crypto wallet and you have the freedom to send or receive cryptocurrency with your wallet anywhere in the world. A decentralized wallet doesn’t guarantee complete anonymity. It simply means you don’t rely on a third party to send, receive, or store your cryptocurrency, removing part of the security risk associated with hosted wallets.
Decentralized wallet is the best one can get. But at the same time it is not as convinient to use as lite version of the wallet. Lite versions relies on full node hosted elsewhere (third party) to validate transactions on the blockchain whereas decentralized wallet don’t rely on a third party to send, receive, or store your cryptocurrency, removing part of the security risk associated with hosted wallets.