Recent Posts

What is a Blockchain Wallet?

What is a Blockchain Wallet?

Throughout the evolution of technology, we, by the nature of our being, have always challenged the existing system. At the core, we are problem solvers who never rest until we are done with our issues. Blockchain can also be understood as a great solution for an entire spectrum of predicaments. It is an open, decentralized ledger that can efficiently and permanently record transactions between two parties. The fundamental need to initiate and complete a transaction gave birth to the concept of a public key and a private key per user. 


This course of action gives way to the thought that since we are doing a transaction, and we are also using two cryptographic keys, “Is there a way to keep all this metadata secure and ready to use at a moment’s notice?”


Indeed. It is called a blockchain wallet.


What is Blockchain Wallet? 


Necessity is the mother of invention. In this case, slow centralized traditional banking systems gave way to blockchain technology. Earlier systems used to have a central point of failure which made the data susceptible to manipulation and corruption. This is where blockchain wallets come to the rescue. It is very convenient to set up and use. Just like how you use a PayPal wallet to transfer money, a blockchain wallet deals in cryptocurrencies like Bitcoin, Ethereum, Litecoin, etc. 


You name it, they have it. 


It provides a hassle-free interface that works on both web and mobile interfaces. The redeeming quality of this system is transaction security and privacy. Both of these points are enforced via cryptographically generated keys, namely a public key and a private key. 


Trends and Stats


Blockchain.com started offering blockchain wallets in November 2011 and now has reached an all-time high of 75.9 million wallets.


(Source: blockchain.com)


At the advent of blockchain, there were not a lot of providers offering blockchain wallets. During that time blockchain.com was one of the first to offer systematic blockchain wallets. Over the last 10 years, it has observed an exponential growth rate as the user base increased.


In January 2021, Coinbase achieved the highest ever daily active users (600,000)  in the US. This was 10 times more than blockchain.com


(Source: Statistica)


Coinbase is one of the most popular providers in the industry. At the end of 2020 and early 2021, there has been a substantial increase in the crypto user base. This has caused the daily active users of most platforms to essentially double.


Coinbasereceived VC funding of $251M between 2014 and 2017


(Source: Statista)


Blockchain figures can sometimes reach hundreds of millions of dollars. Coinbase received venture capital funding of more than 250 million dollars between 2014 and 2017. During these three years, they successfully transformed huge investments into a trading market used by millions of people around the world.


Blockchain market value in South Korea started from around $20.1B  in 2016 and will reach approximately $356.2B by 2022.


(Source: Statista)


Blockchain’s growth was always predicted to be huge, but no one could have predicted that the market will grow by more than 150 billion US dollars in just two years, only in South Korea. Even more surprising is that this market is expected to double in just four years to 356.2 billion U.S. dollars.


How does a Blockchain Wallet work?


The best part about blockchain wallets is, they are easy to use. As discussed earlier, the blockchain wallet works around the concept of public keys and private keys. These are akin to the credentials that you may use at a social media site or on your mail. Your public key is analogous to your username while your private key is your wallet’s password. Unless you have both of them, you can’t access or transfer your possessions. Whereas, for receiving funds, the sender only needs the recipient’s public key. Both the public and private keys are generated when you create your blockchain wallet and this wallet is persistent regardless of whether the user can or can not access it. The most important thing to remember is that the private key is supposed to be treated as a top secret. Anybody with access to your public key and private key can easily access your wallet and in layman terms, results in depleted deposits.


Why should you go for a Blockchain Wallet?


Now that we have a fundamental understanding of how a blockchain wallet works, let’s dive deeper to understand why you should go for it. A Blockchain wallet functions similarly to any other piece of software or wallet you use for day-to-day transactions. It’s simply a matter of safeguarding your private key. 



  • It allows for cross-border transactions to be completed instantly. 

  • They are also barrier-free, with no middlemen.

  • Transaction fees are kept to a minimum. 

  • The cost of transferring funds is significantly lower than it is with traditional banks.

  • It allows for the exchange of multiple cryptocurrencies. 

  • It also enables you to perform basic currency conversions.


Another thing to take a mental note of is that your wallet is a gateway to your assets. It doesn’t contain your assets. In case you lose your private key, you will lose access to your wallet and by extension to all your assets.


Types of Blockchain Wallet


Inherently, blockchain wallets can be classified into two types: hot wallets and cold wallets. Hot wallets are like normal wallets that we carry for day-to-day transactions, and these wallets are user-friendly. Whereas, Cold wallets are similar to a vault; they store cryptocurrencies with a high level of security.


Hot wallets are the most commonly used blockchain wallets simply due to the virtue of being easy to set up and easy to go. They are dynamic in nature and are meant for your everyday cryptocurrency users who regularly deal in crypto. Hot wallets are connected to the internet and are conveniently accessible through web and mobile interfaces. As such, the private keys are stored over the cloud for swift access. The only chink in their armor is that of security. Storing large amounts of digital assets in a hot wallet is not recommended as it is left vulnerable to potential cyber security breaches. There are a plethora of hot wallets available in the market, each providing the baseline service along with their additional quirks. 


A user must understand the terms properly before selecting a wallet suitable for their needs. Examples of hot wallets are Coinbase and Binance.


A cold wallet is an offline digital wallet that is homologous to vault storage. In this methodology, the transactions are signed offline and it needs to connect to the internet to disclose them. High security and reliability are the perks of maintaining the wallet offline. Some popular categories of cold wallets are hardware wallets and paper wallets. The essence of security provided by cold wallets lies simply in the fact that they are inaccessible over the internet due to their physical nature. Their only flaw is that due to the cumbersome transfer process, this type of wallet is not suitable for daily crypto exchanges. Some examples of cold wallets are Trezor and Ledger.


Hot vs Cold Wallet


Hot and cold wallets form the yin and yang of the blockchain wallets. Both of them have their unique features but they simultaneously represent the best practices available to us. 



  • Hot wallets are dynamic in nature whereas cold wallets are static. 

  • Hot wallets are suitable for regular and daily trade but cold wallets function more as a safe vault. 

  • Due to high availability, hot wallets are at greater security risk than cold wallets which are simply isolated to external connections for a majority of the time.


The user has the liberty to choose between either of the wallets. A simple question that can help one to select the right wallet is, “What is my purpose in getting a blockchain wallet?”. For everyday trading, the user would find a hot wallet more convenient and a cold one for scenarios that favor security and low-frequency trading.


Custodial vs Non-custodial wallets


Once one enters the realm of crypto trading, they have to decide on which type of wallet they need, i.e. either custodial or non-custodial. In the case of a non-custodial wallet, the users are the overseer of their private keys. They are in charge of managing their private keys and by extension, their cryptocurrency portfolio. There are no third parties involved and they need to take precautions towards protecting their own keys and funds. 


A custodial wallet, on the other hand, requires a trusted third party who will manage your private key. Most of the web-based crypto wallets are custodial wallets and your first crypto purchase will likely end up in a custodial exchange crypto wallet. It is imperative to have a trusted and reputable custodial wallet where the majority of customer funds are stored with high security in cold storage hardware wallets. While a custodial wallet may be considered less secure, at the same time it waives the customer’s share of responsibility in managing the key and funds. Not only that, the exchange may provide sufficient support in case you lose your password. Contrary to this, for non-custodial wallets, losing your password or the private key might have a catastrophic effect. 


Software Wallets (Hot)


Software wallets are generally web, mobile applications, or desktop software, downloadable on a device that can be accessed through the internet. Software wallets are inherently hot in nature, i.e. they are dynamic, can be used anytime, and are always connected to the internet. Some of the popular software wallets are Exodus, Jaxx, Copay, etc. Software wallets can be further categorized into 3 types:



  • Mobile Wallet: Mobile wallets come in the form of smartphone applications that are easily installed and easy to use. These wallets are geared towards accessibility. Since accessing and using a mobile device is more convenient, these wallets are gaining widespread popularity. One major drawback is that mobile devices are usually more vulnerable to malware, viruses or simply getting lost. This could prove very detrimental in many cases, hence additional caution is required. Example – Mycelium.



  • Desktop Wallet: Desktop wallets are software that stores cryptocurrency metadata on a personal computer. It is only accessible to the owner of the PC and private keys are stored on the desktop only. Desktops are usually protected by a denser layer of security which makes them a secure device option to use as a wallet, at the cost of reduced mobility. Having a decent firewall, antivirus, and antimalware are some of the crucial requisites which must be met. Example – Electrum.



  • Online/Cloud Wallet: These are the hot wallets that run on the internet and are accessible from a wide range of devices, including mobile, desktop, tablets, etc. Your private keys are stored over the cloud and are managed by a third party. This facilitates password recovery in case it is lost. The security of the wallet is managed by a trusted third party and hence it is one of the most popular choices. Example – GreenAddress.


Hardware Wallet (Cold)


A hardware wallet is a type of cold wallet that employs an independent and encrypted hardware device, like a USB thumb drive, hard disk, etc… to store the user’s private key. The most important aspect of Hardware wallets lies in their plug-and-play utility. These devices can be attached to any desktop and in some mobile devices to access the wallet and perform the desired transaction. Due to the isolated nature of the hardware, the probability of the wallet being corrupted by malware is greatly diminished. One must practice caution against buying a second-hand hardware wallet. Some of the popular hardware wallets are Trezor and Keepkey.


Paper Wallet (Cold)


The only data which cannot be hacked by cyber means is the data that doesn’t exist digitally. This could be considered as the key philosophy behind a paper wallet. A paper wallet is an offline process of printing the public and private key on paper and removing any digital traces of the same. In this way, there is only a printed copy of keys left which can be used to access the wallet by either directly entering the keys or by converting them into a QR code to scan. It is very popular among users who deal with large quantities of cryptocurrency over the long term. The only drawback is that additional precautions need to be placed in preserving the paper. Some of the popular paper wallets are BitCoin paper wallet and MyEtherWallet.


Conclusion


Blockchain wallets provide an expedient and pragmatic way to deal with cryptocurrency. There is an entire pantheon worth of wallet providers, each providing something extra than others. Even after that, the key point remains that every person’s objective to use a blockchain wallet may be different, hence proper study is an essential prerequisite before entering the crypto market. We have covered all the major blockchain wallet types, along with their pros, cons, and how they fare relatively amongst them. A user should consider all these options as an exquisite buffet and derive a tailor-made solution that works in their favor. 


Finally, security is the key to any transaction. However secure a system may be, the user must exercise caution from their end. This is especially applicable for blockchain wallets. 


Come and be a part of the alluring future of Blockchain. 


Happy Trading!


(Visited 32 times, 1 visits today)
Andres Zunino

Chief of Operations at ZirconTech - Blockchain Enthusiast