Crypto Wallets

Cryptocurrency wallets store users’ public and private keys while providing an easy-to-use interface to manage crypto balances. They also support cryptocurrency transfers through the blockchain. Some wallets even allow users to perform certain actions with their crypto assets, such as buying and selling or interacting with decentralized applications (dApps).

It is important to remember that cryptocurrency transactions do not represent a ‘sending’ of crypto tokens from one mobile phone to another. When sending tokens, a user’s private key signs the transaction and broadcasts it to the blockchain network. The network then includes the transaction to reflect the updated balance in both the sender’s and recipient’s addresses.

So, the term ‘wallet’ is somewhat of a misnomer, as crypto wallets don’t actually store cryptocurrency in the same way physical wallets hold cash. Instead, they read the public ledger to show the balances in a user’s addresses, as well as hold the private keys that enable the user to make transactions.

Why Is a Crypto Wallet Needed for Storing Crypto Assets?

A user’s cryptocurrency is only as safe as the method they use to store it. While crypto can technically be stored directly on an exchange, it is not advisable to do so unless in small amounts or with the intention of trading frequently. For larger amounts, it’s recommended that a user withdraws the majority to a crypto wallet, whether that be a hot wallet or a cold one. This way, they retain ownership of their private keys and have full power and control over their own finances.

How Do Cryptocurrency Wallets Work?

As mentioned earlier, a crypto wallet doesn’t technically hold a user’s coins. Instead, it holds the key to their coins, which are stored on public blockchain networks. In order to perform various transactions, a user needs to verify their wallet address via a private key that comes in a set of specific codes. The speed and security often depend on the kind of wallet a user has.

Why Are Wallets Extensions?

• Convenience: Wallet extensions are designed to integrate seamlessly into web browsers, making it easy for users to access their wallets without switching between applications.
• User Interface: Browser extensions provide a user-friendly interface for managing cryptocurrencies, simplifying complex processes for beginners.
• Direct DApp Interaction: Wallet extensions allow users to connect directly to dApps on the web, enabling transaction signing and asset management without leaving the application.
• Enhanced Security: Extensions can offer additional security features, such as requiring a password or biometric authentication to access the wallet.
• Cross-Platform Compatibility: Being browser-based allows wallet extensions to be used across different devices, making asset management easier.

Types of Crypto Wallets

There are two main types of cryptocurrency wallets: software-based hot wallets and physical cold wallets. Read on to learn about the different types of crypto wallets, and which may be the best fit.

• Hot Wallets: These are connected to the internet, making funds easily accessible but also more vulnerable to hacks. Private keys are stored and encrypted on the app itself.
• Cold Wallets: These are entirely offline and offer greater security. Examples include physical mediums like paper or engraved metal.

How Do Wallets Interact with dApps (Overview)

Wallets interact with decentralized applications (dApps) by acting as the bridge between the user and the blockchain. Here’s an overview of how wallets and dApps communicate:

1. Connecting to the dApp:

   When a user opens a dApp, they are prompted to connect their wallet, which triggers a connection request.

2. Reading Data from the Blockchain:

   Once connected, the dApp can read data from the blockchain, such as token balances or transaction history.

3. Transaction Requests:

   When performing an action, the dApp prepares a transaction and sends it to the wallet, which the user reviews and signs.

4. Monitoring and Finalizing the Transaction:

   Once confirmed, the dApp updates the user interface and notifies the user about the transaction status.

Role of Wallets

• Security: Wallets protect the user’s private keys and never expose them to the dApp.
• Convenience: Wallets simplify interactions with the blockchain by managing gas fees and signing processes.
• User Control: Wallets ensure that users retain control over their dApp interactions and transactions.

Key Technologies

• Web3.js or Ethers.js: Libraries that dApps use to connect with wallets.
• RPC (Remote Procedure Calls): Used by wallets to interact with blockchain nodes.
• WalletConnect: A protocol that allows mobile wallets to connect to dApps via QR code.