Having an understanding of crypto wallets and how they work is important if you are truly wanting to get into crypto and keep your crypto safe.
There are many types of wallets and some terms are used interchangeably or have multiple meanings depending on context and the person using the terms (even the term “wallet” itself can be used to mean different things!), which can be confusing.
This article will provide an overview of what wallets are, how they work, the various types available and their pros/cons.
If you’re totally new to things, it might take a few reads!
What is a crypto wallet?
If you already know a bit about crypto, you’ll know that wallets are used to store your currency and transact — ie. send, receive, spend.
More accurately, a true crypto wallet is an interface to the blockchain where your crypto is stored.
Yes, your crypto is actually “stored” on the blockchain; a wallet simply allows you to access it (via the “private key”) and the associated address allows anyone to send crypto assets to it (aka the “public key”). This will be protected by a seed phrase.
Very crudely;
- Public key: your public address – similar to your home address or bank account number. This is a very long series of characters that is shortened to an ‘address’ (which is shorter, but still quite long!) where crypto can be sent.
- Private key: the password for your address – similar to the keys to your house or your bank login details, this should be kept private. It is an extremely long string of characters (so long, some could fill an entire page of a Word doc!).
- Seed phrase: an encrypted human-friendly “phrase” version of a very, very, very long private key or string of characters (eg a private key or master private key).
Initially, most wallets were for a single blockchain and these are still very popular.
This is because an address (sometimes people call it a wallet) is specific to a blockchain — ie. a Bitcoin address is specific to the Bitcoin blockchain. You cannot send Bitcoin to an Ethereum address, or if you do, it might be lost forever.
However, there are now multi-crypto wallets that support several blockchains.
And…there are “wallets” on exchanges that are not real blockchain wallets.
More on these later. Just keep it in the back of your mind.
I told you it can get confusing!
The security of a crypto wallet primarily is around the private key and how it is stored.
Which brings us on to…
What is a seed phrase or mnemonic / private key?
Your seed phrase is the key (password) to access all the crypto in that particular wallet. It is a series of words, either 12 or 24 words.
In the background, these words translate to a very long number; a mnemonic key or private key. A key that can be used to access one blockchain wallet/address or many.
In essence, the seed-phrase is an encrypted version of that very long number — a much easier way for humans to read it (and write it!) with less chance of error.
As such, you may hear various terms used;
- seed phrase
- private key
- mnemonic key
- mnemonic seed
- backup seed
- recovery phrase
- secret phrase
In most cases, when people use these terms, they are referring to the same thing; That series of words that gives you complete ownership of the wallet.
If you don’t have the seed phrase or private key, then you don’t really own the crypto.
ie in custodial exchange (aka centralised exchange aka CEX), you do not have a seed phrase or private key for your “wallet” because it’s not a real wallet on the blockchain — it is their internal wallet, or silo, that separates your crypto from that of others within the exchange.
If you have crypto on an exchange, it only becomes registered on the blockchain to your address when you withdraw it to a proper wallet on a blockchain.
Very important
Whoever has the seed or private key has access to all the crypto in those wallet(s).
Your seed phrase and private key(s) are keys to the kingdom; NEVER give them to ANYONE and always store the seed phrase very carefully. Ideally write it out multiple times and store in separate, safe locations. DO NOT store it on your device or on the cloud eg in Google docs.
If ANYONE asks you for your seed phrase or requests you input it to a piece of software DON’T DO IT – IT IS A SCAM.
If you take just one thing away from this article, it is the importance of keeping your seed phrase safe and NEVER giving it to anyone!
What is the difference between a seed phrase and private key?
A private key is the pair to your public key (address). It is the key to access that single account/address on the blockchain. A seed phrase (human-friendly version of the private key) can be generated for ease of use.
A seed phrase can also be generated as a “master seed” to house multiple accounts or sub-accounts.
Many wallets use this method eg in Ledger hardware wallet you have one master seed phrase but within your Ledger, you can create multiple accounts eg you can have several Bitcoin addresses all protected by the same seed phrase.
The same is true for MetaMask (allows you to create multiple Ethereum addresses) and various other wallets.
What is a public key?
When people say “public key”, they usually mean the address of the wallet ie. your Bitcoin address or Ethereum address.
In reality, the public key is actually a really long, ugly unfriendly number….and the address you give to people or send crypto to is the “human-friendly” version (which is still fairly long & ugly!).
Different blockchain = different wallet/address/public key
Each type of blockchain usually has its own wallet to interact and with it, comes a blockchain address, sometomes referred to as your “public key”.
For example, Bitcoin, Ethereum and Tron are all different blockchains — you cannot store their assets (BTC, ETH, TRX) in the same way or in the same address because they exist in entirely different worlds.
Yes, there are wallets that support multiple blockchains such as hardware wallets Trezor and Ledger and many hot wallets such as Exodus.
However, you will note that even within these multi-blockchain wallets, each network/blockchain has its own address.
ie. your Bitcoin address (public key) will be different to your Ethereum address (public key).
The difference between crypto coins and tokens
These words are often used interchangeably, however they are different and it is useful to understand in the context of wallets.
A coin generally means something with its own blockchain and therefore a unique wallet / address eg. Bitcoin, Litecoin, EOS, Ripple, Ethereum
A token is something that is created on top of a blockchain and therefore these tokens can all be stored in the same address.
As you can imagine, all is not set in stone!
Ethereum is a blockchain on which many ERC-20 tokens are created and operate, however ETH and Ethereum is also referred to as a token itself on the Ethereum network.🤯
Hot wallets
A hot wallet is online ie. it is software and connected to the internet. They can be desktop, mobile or browser-based. Hot wallets are generally the least secure way of storing crypto (and the easiest / most accessible).
When creating a hot wallet, the seed phrase will appear on your computer/mobile for you to save. The private keys are also encrypted and on the device.
Cold wallets
A cold wallet is offline….at it’s most basic, it is a seed phrase written on a piece of paper. Tech versions are called hardware wallets.
The seed phrase or private key is never stored on your computer/mobile device.
Hardware wallets
A hardware wallet is a form of cold wallet that uses hardware to authenticate transactions. Examples are Ledger and Trezor.
When you setup a hardware wallet, the seed phrase is generated on the hardware device – it is NEVER stored on your computer/mobile device and will never even have appeared on the screen.
Exchange “wallets”
As already mentioned, your “wallet” within an exchange is not a real wallet on the Blockchain.
How these operate (eg hot/cold storage and levels of security) vary by exchange and this is one reason you need to be careful; the security of your crypto is down to them.
The other reason not to store too much crypto on an exchange is that you are not in control of it; it is in the custody or control of the exchange.
Moving to a different wallet
Do you remember that your crypto is actually stored in the blockchain and the wallet is simply an interface to interact with it?
This means that in many cases, you can move from one wallet to another by importing the private key to that wallet; a reminder that the private key is everything! It also means don't panic if you break your hardware wallet (so long as you have the seed phrase!).
For example, if you have an Ethereum account in your Exodus wallet (a multi-blockchain wallet), you could export the private key and import it to MetaMask. Now you can access all the tokens in that wallet from MetaMask.
Of course, this is only possible if the wallet supports it.
Sending coins/tokens (costs and fees)
When sending crypto, each blockchain has its own fee structure that is charged in the native coin/token.
Sending Bitcoin will cost you a little Bitcoin in network fees.
There are no fees to receive coins/tokens.
With Ethereum and ERC-20 tokens it is important to note that any ERC-20 smart contract token will require ETH (Ethereum) as a gas fee to transact.
For example, if you have STRONG (which are ERC-20 tokens), you will need ETH in your wallet for gas if you wish to do anything such as send tokens, create a node, claim node rewards or pay fees.
This is the same for most Ethereum-compatible chains such as Avalanche, Fantom, Polygon; gas fees are in the native token (AVAX, FTM, MATIC).
Gas fees are beyond the scope of this article, however one thing to note is that they vary depending on congestion within the network ie there are busy times to travel (expensive) and quite times (cheap).
Ethereum and ERC-20 tokens (smart contracts)
One of the things people find most confusing is tokens vs coins (and blockchains vs smart contracts).
Ethereum and its ERC-20 network was the pioneer in allowing smart contracts and other tokens to build on top of their blockchain network.
There are thousands of ERC-20 tokens, all built on top of Ethereum, and each of them can be sent to your Ethereum address (also 721 tokens – NFTs). Examples include; STRONG, LINK, BAT, USDT*
Yes; that one Ethereum address can hold hundreds of different ‘ERC-20' tokens.
As already mentioned, transacting any ERC-20 token requires ETH for gas.
* some tokens can exist on multiple networks eg USDT can operate on Ethereum (ERC-20), Tron (TRC-20) or OMNI Layer (OMNI – built on the BTC blockchain network)…yes; more confusion!
Avalanche (AVAX), Binance Smart Chain (BSC), Polygon (MATIC), Fantom (FTM)…
And as the years have passed, many “Layer 2”, “side chain” and “compatible” networks have evolved, most notably for Ethereum / ERC-20.
They tend to offer much faster and much cheaper transactions than using the Ethereum network itself.
We won’t go into any details regarding these networks or their differences.
All you need to know is that they are Ethereum-compatible and that the operate in a similar manner to ERC-20; they have their own primary token that is required as gas for every transaction.
For example, any project (token) built on the Avalanche network (AVAX) will require AVAX as the gas fee to transact, those on Fantom network require FTM and those on Polygon require MATIC.
Yep; that MATIC name throws ya – Polygon was originally called Matic and the $MATIC ticker stuck, even after the name change!). Just another sprinkle of confusion!
MetaMask: Ethereum & Ethereum-compatible wallet
Just to make things simpler (and, yet again, more confusing!), wallets/interfaces such as MetaMask enable to you add not only many Ethereum accounts/addresses, but also other Ethereum-compatible networks and interact with them using the same Ethereum address!
I will write a full article on MetaMask soon, including how to add different networks. (View this post: https://vanlifeincome.net/beginner-guide-to-metamask-inc-custom-networks)
It’s important to learn about MetaMask if you wish to engage with any of these compatible networks and DeFi products.
Another option is TrustWallet – it supports many blockchains and has many of the features of MetaMask. MetaMask is still the leader in terms of usage for DeFi and as such you will often find it's the most supported, especially by newer/smaller projects.
Crypto wallets roundup
So, there you have it; a not-so-brief overview of crypto wallets.
My #1 suggestion for anyone getting into crypto is to purchase a hardware wallet and use it religiously. Please research this more, especially in relation to MetaMask and before you make any big decisions or sizeable transactions.