What is a Blockchain Wallet?
A blockchain wallet is a tool for storing and managing private keys. It provides core financial functions including wallet address creation, crypto asset transfer (receipt and sending), and transaction history query for wallet addresses. It can also interact with decentralized applications (DApps) or smart contracts on the network, making it a critical infrastructure for crypto assets.
The reason why a wallet is regarded as the key infrastructure for crypto assets is that crypto assets must be stored in a wallet when we conduct on-chain transactions. Below, we will introduce the basic concepts of wallets in detail.
1. Basic Concepts of Blockchain Wallets
First, let's briefly explain the encryption principle of blockchain wallets.
Generally speaking, an encryption system consists of three parts: an encryption and decryption algorithm, an encryption key, and a decryption key. The relationship between the three can be analogized to a key and a lock: the key is the private key in cryptography, and the lock is the encryption and decryption algorithm.
In daily life, the most common encryption method is "symmetric encryption", which uses the same key for encryption and decryption. In contrast, blockchain wallets adopt "asymmetric encryption", which uses different keys for the encryption and decryption processes. Of the two keys, the most core one is called the private key, which is kept by the user; the other is made public and called the public key. This design is intended to protect the privacy of the content and prevent identity impersonation.
Mnemonic phrases, Keystore, and passwords are auxiliary tools designed to facilitate user memory and further ensure security.
Next, let's take a detailed look at the five key concepts mentioned above, which are closely related to every user in the process of using a blockchain wallet.
Public Key
A public key is equivalent to your bank card number and also serves as a transfer address, so it can be disclosed to the public.
Private Key
A private key consists of numbers and uppercase and lowercase letters, and the length of the private key varies across different blockchains. The public key can be derived from the private key. It is important to note that once your private key is lost or forgotten, it cannot be recovered, so you must keep it properly.
Mnemonic Phrase
Mnemonic phrases were created because private keys are not easy to remember, and they are simply another form of presentation of the private key. They usually consist of 12 or 24 English words, and Chinese version mnemonic phrases are also available for the convenience of domestic users. As long as you remember these words and enter them in the wallet in the correct order, you can restore the wallet and perform any operations.
Keystore
A Keystore is essentially an encrypted private key, and it is only valid when used in conjunction with your wallet password. Keystore, private keys, and mnemonic phrases are universal across all wallets. Wallet service providers may only provide users with one or more of these methods due to product design reasons. However, if the same method cannot be used to restore the wallet normally in a certain wallet, there may be certain problems with that wallet.
Password
To further enhance security, most wallets use a password to perform secondary encryption on the private key. The encryption and storage methods vary from wallet to wallet. This is why you always need to authorize when using a wallet to conduct transactions. Behind this authorization lies a complex process: the wallet uses the password to decrypt the private key, and then uses the private key to sign the transaction.
Summary: The public key can be disclosed to the public without affecting the security of your assets. However, once your mnemonic phrase, Keystore, private key, or password is leaked, your assets are at high risk of being controlled by others. In this case, you need to immediately transfer your assets to another address and stop using the original account or address.
2. Functions of Blockchain Wallets
A wallet is the entry point to the blockchain, with a rich set of functions including asset management and trading, participation in project ecosystem development, and DApp interaction, which can meet the diverse needs of users.
Blockchain Account Creation
The process of creating a blockchain account is relatively complex, and wallets help users simplify this process. Generally, during the account creation process, the wallet will guide the user to back up the private key or mnemonic phrase, and then perform secondary verification to ensure that the user's backed-up private key or mnemonic phrase is accurate. For blockchains that require payment to create an account, the wallet usually helps users complete the payment process using traditional payment tools to reduce the difficulty of use.
Crypto Asset Management
Wallets greatly facilitate users' management of their held assets, mainly including transfers, receipts, viewing asset details, and transaction details. Its functions are similar to a banking APP: you can view what assets you currently hold, the quantity, and perform operations such as transferring your assets.
Participation in Ecosystem Development
At present, the design of some public chains incentivizes users in the ecosystem to actively participate in the construction of the public chain ecosystem. The main forms include node voting, referendum, Staking, etc., all of which can be participated in through a wallet.
DApp Interaction
At present, some large-scale DApps exist in the form of third-party independent APPs. When experiencing these APP-based DApps, you also need a wallet as the medium for login and transaction authorization.
Claim Airdrop Rewards
One of the benefits of owning a wallet is the ability to receive airdrops from time to time (airdrops refer to Tokens obtained for free on the blockchain). Since you can quickly log in to decentralized exchanges through the wallet, many users can directly sell the airdropped tokens on the exchange and convert them into mainstream assets such as ETH and USDT after claiming them.
Asset Appreciation
Wallets inherently have financial attributes. Currently, wallets have integrated a variety of financial tools and functions including mining pools, wealth management, mining, and project investment, which can meet users' needs for asset appreciation.
In addition to the above basic functions, some blockchain wallets also have functions such as social networking, information access, and supporting management of hardware wallets.
3. Common Classifications of Blockchain Wallets
Wallets have a wide range of functions, but not every wallet has all functions, with different focuses. Below we introduce the common classifications of blockchain wallets.
(1) According to whether the user holds the private key: Custodial (Centralized) Wallet and Non-Custodial (Decentralized) Wallet
First, let's introduce the custodial (centralized) wallet. Its core feature is that the user does not hold the private key of the wallet, which is kept by a third party or service provider on behalf of the user. The advantages of a custodial wallet are obvious: it is simple and easy to operate, the password can be retrieved if forgotten, and the transaction efficiency is very high with real-time arrival. However, the private key of a custodial wallet is fully controlled by the platform.
In contrast, a non-custodial (decentralized) wallet allows the user to hold the private key of the wallet independently, and the third party or service provider does not know or hold the user's private key. If the private key is lost, the non-custodial wallet cannot help the user recover it, and the funds will be lost forever. However, non-custodial wallets are not vulnerable to centralized hacker attacks, and users do not need to worry about the theft of assets by the wallet service provider.
The following are several well-known non-custodial wallets:
Coinbase: Easy to use, medium security, available on mobile and desktop.
MetaMask: Easy to use, medium security, available on mobile and desktop.
imToken: Easy to use, medium security, mobile wallet.
AToken: Moderate ease of use, high security, mobile wallet.
HyperPay: Moderate ease of use, medium security, mobile and hardware wallet.
Jaxx: Difficult to use, medium security, mobile and hardware wallet.
(2) According to whether the wallet is connected to the network: Cold Wallet and Hot Wallet
Non-custodial wallets can be divided into cold wallets and hot wallets according to whether the private key is exposed to the network during storage.
A cold wallet, also known as an offline wallet, is used in a way that is physically isolated from the network, so it is usually operated on a phone with no internet connection or an unused computer. Common cold wallets today include paper wallets, brain wallets, USB flash drives, hardware wallets, smart watches, and other smart storage hardware. Trezor, Ledger, and Keepkey are common blockchain cold wallets, which usually have relatively few functions and a simple interface.
A hot wallet, on the contrary, is a wallet that stores the private key with an internet connection, hence also called an online wallet. It usually appears in the form of an App or web page, developed by a third party or service provider. In most cases, the private key of a hot wallet is held by the third party or service provider, not the user.
Generally speaking, most users prefer hot wallets because they are more convenient to use. Cold wallets are usually used by users with large holdings, who pay more attention to mitigating the risk of hacker attacks.
(3) According to the degree of decentralization of the wallet: Full Node Wallet and Light Node Wallet
A full node wallet is a blockchain wallet that fully stores all transaction data of the blockchain, and is usually used as an official wallet together with the node client. It can trace the origin of crypto assets and verify their authenticity; it can independently verify whether transactions on the blockchain are completed, how many block confirmations they have received, whether the address has sufficient balance, whether there is double-spending, and more. Due to the huge amount of data stored in a full node wallet and the need to synchronize data with the blockchain in a timely manner, there are many restrictions on its use.
Full node wallets are not very convenient to use, which led to the creation of light node wallets. Light node wallets rely on other full node wallets in the blockchain network. Generally, a light node will run a full node to synchronize all data, then divide the data according to different wallet addresses and distribute it on demand. These wallets only retain the basic functions of a blockchain wallet, namely deposit and withdrawal functions and transaction verification functions, to ensure that the transactions conducted by users are real and have received sufficient confirmations.
Light node wallets provide a better user experience, especially for blockchain novices. They only take up a small amount of space, can be installed on mobile phones or other mobile devices for use anytime and anywhere, and can support multiple crypto assets, so most users choose light node wallets.
(4) According to multi-currency support: Single-Currency Wallet, Multi-Currency Wallet, and Full-Currency Wallet
As the name suggests, a single-currency wallet is a blockchain wallet that only serves a single blockchain crypto asset. Since it usually only supports a single blockchain mainnet platform, it is also called a mainnet wallet, generally developed by the project team or the community.
A multi-currency wallet is a wallet that supports multiple blockchain crypto assets. It can support a single blockchain mainnet and tokens issued based on the mainnet protocol, or support different crypto assets on multiple blockchain mainnets.
A full-currency wallet is a blockchain wallet that supports all types of crypto assets and tokens on all blockchain mainnets. With the development of blockchain technology, the number of crypto asset types has reached thousands. Full-currency wallets emerged to address the inconvenience of managing an increasing number of different types of crypto assets.
There are many ways to classify wallets. In addition to the above four categories, they can also be divided into software wallets and hardware wallets according to whether they exist in hardware or software form, single-signature wallets and multi-signature wallets according to the private key signature method, and single-chain wallets and multi-chain wallets according to the number of supported public chains, etc. We will not elaborate on them here, and you can choose the appropriate wallet according to your needs.