What is a Cryptocurrency Wallet?
Cryptocurrency wallets are programs or software that enable the storage of public and private keys for cryptocurrency transactions. And apart from this basic function of storing the keys, a cryptocurrency wallet also offers the functionality of encrypting and signing cryptocurrency transactions.
When you say you have cryptocurrency, what you’re really saying is you have a private key that proves ownership of that cryptocurrency. Since it’s stored on the blockchain, anyone can verify you as the owner with your public key.
The Public key is the address of your wallet through which a person could send you cryptocurrencies. It’s just like the UPI ID in Google Pay or other UPI apps, one can use it to send you money.
The Private key is used to send cryptocurrency to others. Consider it as the password or the pin using which you can send money from your account. Although using a Public key you receive cryptocurrencies but you still need a Private key to access them or to prove that you’re the owner of the cryptocurrency received.
While you can generate multiple public keys using a private key, doing the opposite is practically impossible because of the “trapdoor” function which makes a cryptocurrency wallet more secure and hack-proof. The trapdoor is a one-way mathematical function that is easy to solve in one way but nearly impossible to solve in the reverse without special information which is in the private key.
There are 3 steps for a cryptocurrency transaction to be completed.
- A transaction is encrypted using the public key of the sender which could only be decrypted by the private key of the receiver.
- The transaction is digitally signed by the sender using their private key. A digital signature is generated by combining the private key with the data being sent in the transaction. You digitally sign a transaction to prove you’re the owner of the funds and you’re sending them to the receiver’s account.
- Finally, the transaction is verified as authentic using the receiver’s public key.
Lastly, there are two types of wallets, Custodial and Non-custodial wallets also known as hot and cold wallets. Custodial wallets are controlled by a third-party provider like Coinbase or CoinDCX and the public and private keys are stored online, while non-custodial wallets allow for true self-custody like Metamask and the private keys could be stored offline.
Although Custodial wallets are considered less secure than Non-custodial wallets, many prefer them as they are easy to use and you don’t have to remember long passwords, unlike non-custodial wallets. Even if you forget the Custodial wallet’s password, you have the option to reset it but for Non-custodial wallets, you can say goodbye to your cryptocurrencies. With those pros, the con of Custodial wallets is that they ask for your personal information to verify you, while in the case of Non-custodial wallets, they don’t ask for any of the personal information to be shared.
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