Your Crypto Wallet is the most central component of your personal interactions with a blockchain network. Despite their centrality, the basic choices and details about crypto wallets are not easy to understand.
Fundamentally, a crypto wallet stores a copy of the digital keys that control all of your assets on the blockchain. In western cultures, a wallet is the thing most men use to keep some cash, a form of Identification, membership cards, and pictures of their kids or pets. Unlike physical cash or pictures of your cat, crypto assets are stored on a blockchain network that is distributed all over the world. You can think of your crypto wallet more like a window or an app for interacting with your crypto assets on a global blockchain network. As the uses of blockchain technology evolve and grow, especially in Cardano, crypto wallets will become even more powerful applications, potentially becoming a “digital citizen center.”
Today, most wallets simply let you enter your digital keys so you can send money and see how much money you have on a blockchain network. You typically only have to enter your passphrase once, because the wallet keeps a copy of it so future interactions are faster. Before learning a little more about the exciting plans for Cardano wallets specifically, let’s take a quick look at the different types of wallets you may hear about: hosted wallets, non-custodial wallets, and hardware wallets.
These are wallets whose digital keys are created and owned by a third-party service provider. When you hold your crypto in a hosted wallet, you are trusting that provider to keep your crypto for you, much like a bank does for fiat currency. The most popular hosted wallets are crypto exchanges; Bitpoint, Coinbase, Binance are a few examples. These platforms give you a username and password that lets you manage your crypto.
Hosted wallets may be the least intimidating to newcomers, but ultimately they are also quite limiting. Exchanges focus only on buying and selling crypto. Users cannot perform other blockchain functions, such as selecting a staking pool, voting, trading NFTs, or logging into a website.
“Non-custodial” or “self custody” wallets are software applications that let you create your own digital blockchain keys and interact with the blockchain directly on your personal computer or smartphone. These wallets come in two types. The first type keeps a copy of the entire blockchain on your computer. When using this wallet, you don’t have to go through remote servers; a copy of the entire blockchain exists right on your device. The second type is commonly known as a “light wallet.” Good light wallets still create your keys locally on your device the first time you use them. Functions that require the use of keys are performed locally on your device before being transmitted to remote servers to sync with the blockchain.
Self-Custody wallets are usually full-featured, letting you perform all of the possible actions with your assets directly in the wallet.
A hardware wallet is a physical device, often shaped like a USB thumb drive. A copy of your keys are created and stored on this physical device. Keeping a copy of your keys on hardware, separate from your computer or phone, makes it harder for your crypto to be stolen if your computer is hacked. To perform most actions, you have to connect your hardware wallet to your computer or phone and physically confirm your actions by pressing a button on the device.
Your window into the blockchain
With each of these wallet types, we have discussed the “keys” that control your digital assets. When you engage with a blockchain for the very time, unless you use an exchange or another hosted wallet solution, the first step is to create your digital key. This key is typically a 15 or 24 word mnemonic passphrase, generated by the wallet program. This passphrase key establishes your presence on the network. When you receive assets, the public part of this key is used to sign or stamp these assets. When you send digital assets to someone else or convert from one asset to another, you provide your approval by using the private part of your key.
Even though wallet apps help you create your public and private key in the form of a phrase, it’s important to know that the wallet company does not own your key, or know it. The keys are generated directly on your computer so no other person or company has a copy of it. The blockchain is not a central server. It exists on thousands of devices each with a copy of the network. You can use the same keys to access your digital assets on any wallet on a phone or a computer, if that wallet provides support for your type of key. You can even put your key into two different wallets at the same time to use different features. The wallet is just a window for peering into the blockchain network. This is why it is important to use wallets that are created or recommended by the team building the blockchain network you’re using. It’s important to download your wallet app directly from the website of the company making the wallet. Wallets work by using your secret phrase; if you put your secret phrase into a fake wallet, bad actors can steal your assets. This is like entering your bank password on a fake website. In the case of crypto however, transactions are not reversible. If someone gets your passphrase and steals your crypto, there is no recourse.
Wallets on Cardano
Cardano is being developed for more than just money. On Cardano, you can vote, you can stake, you send and receive NFTs, and of course you can send and receive ADA. IOG, the core developer of the network, has expressed interest in developing Cardano’s Daedalus wallet into a “digital citizen center.” This idea is still purely hypothetical, but it’s exciting to pay attention to what Cardano wallets look like and what they let you do as the network continues to grow and develop. Imagine opening your digital wallet and seeing all of your pay stubs, tax statements, and medical records, all from one app. And since the app provider would not own your data - because they are just windows into the blockchain - developers will always have healthy competition to make the best wallets.