We have covered the basics of blockchain so far. We want to get to cryptocurrencies which most readers would be interested in, right? We are almost ready for cryptocurrencies. We just need to know a few more concepts.
If you want to invest in cryptocurrency, you must understand the blockchain wallet. As an investor, you should know the risk associated with any investment. Once you understand the blockchain wallet, it will be easy for you to decide if cryptocurrency is something you want to invest in or not. Let us directly jump on to the topic.
What Is A Blockchain Wallet?
First thing first – the Blockchain wallet is not like your physical wallet in which you keep physical currency. Blockchain wallet is a program that allows users to monitor and manage different types of cryptocurrencies. Using a blockchain wallet, you can add or withdraw your funds/crypto easily. All the transactions that happen in a blockchain wallet use cryptography and hence are secure. You can use your blockchain wallet from any device with security and privacy.
What is your guess – the Bitcoin (or any other cryptocurrency) you purchase, is it stored in your wallet? The answer is – NO. The blockchain wallet does not store Bitcoin. The records related to the keys are stored on the blockchain in the wallet. Understand it this way – your blockchain wallet stores the ID that helps you track all your transactions using the ID. Think of your blockchain as a platform that lets you receive, send, manage and store your digital assets on the blockchain.
Understanding Blockchain Wallet Better:
In one of the previous articles, we have discussed the public and private keys and their role in blockchain technology. You can share the public key with everyone. The other key you need to keep as a secret (private key). The key is nothing but large non-identical numbers and alphabets. So unless someone has the right combination of public and private keys, it is impossible to access the wallet. It is just like a lock and key we all have used.
Let us understand this with an example of credit cards. When you decide to make a transaction using a credit card, you give the card to the person having the machine. The information on the card at that time is public. The person having your card can see the card number, expiry date, and even CVV. This part of the card is equivalent to the public key of the blockchain wallet. However, just with the public key, the transaction cannot be processed. Only when you give your PIN, the transaction is successful. The PIN is equivalent to the private key of the blockchain wallet.
When you know the right combination, you can access all the assets you have in the wallet.
How Does A Blockchain Wallet Work?
You now know the concept of the private and public keys. So understanding how blockchain wallet works will be easy for you.
Assume – you want to receive Bitcoins from your friend in your wallet. You will give him your blockchain wallet address. Basically, you only share your public key with them. Your friend will send the Bitcoins to you using your public key in a decrypted form. You can only receive the Bitcoin send if you match it with the correct private key (you decrypt it). Once the match is successful, you will have Bitcoin in your wallet.
If you want to sell the Bitcoin, you will first have to authenticate the Bitcoin in your wallet using your private key. When you initiate the transaction, it becomes public. The nodes in the network use the public key that is associated with your private key to authenticate the transaction. Once the authentication is done, you can sell your coin.
Features Of Blockchain Wallet:
- Below are some of the features of a blockchain wallet you should know to have a better understanding.
- These are easy to use, and anyone who has used any financial apps before can start using them.
- You can do the transaction in just a few seconds and send funds to any part of the world without any third parties.
- The transaction fee is very small, even for international transactions. Compared to banks, it is negligible.
- Using the same blockchain wallet, you can do transactions in multiple cryptocurrencies.
- They are highly secure.
What Are The Different Types Of Blockchain Wallets?
There are many types of blockchain wallets. However, we will talk about only a few in this article. At a high level, there are two types of blockchain wallets – Hot wallet and Cold wallet. The difference is in terms of their connectivity with the internet.
Cold Wallet- It is a type of wallet that stores cryptocurrencies offline and hence is more secure. Think of them as a locker you usually have in a bank. You cannot access it as and when you need it. The concept of public and private keys is valid with the cold wallet. The private key is stored in different hardware without connectivity with the internet. The private key can also be stored on a simple paper document.
Hot Wallets- These are those that are linked with the internet and hence are user-friendly. You can access them as and when you want to. However, they carry a risk element. The private key in hot wallets is stored in the cloud.
The wallets you will come across for use will be hot wallets only.
Two Other Types Of Blockchain Wallets:
Desktop Wallets- As the name suggests, these are installed on a personal computer or laptop. Using this type of wallet, you give higher safety to your wallet. However, you may not have access to a PC and the internet all the time. Hence you only use them if you don’t plan to access your wallet every day. Just make sure, your machine has the latest version of antivirus installed. When you want to access your wallet, all you need to do is connect to the internet.
Mobile Wallets- These are a lighter version of your blockchain wallet that ensures you have access to your wallet 24*7. The performance of a lighter version of a blockchain wallet depends on the number of nodes in the process for verification. If the number of nodes is high, the performance will be low.
Is Blockchain Wallet Safe?
If you understood whatever we have discussed with respect to blockchain, how blockchain and blockchain wallet works, you can answer this question with confidence.
The blockchain wallet is 100% safe because it uses a decentralized network and uses the concept of public and private keys. If you are using a blockchain wallet, all you need to ensure is that your private key is safe.
As we discussed, there are a variety of blockchain wallets available. You should pick a type depending on how frequently you plan to use your wallet and how big transactions you plan to do. If you want to use a wallet for daily transactions, you have to opt for a hot wallet (mobile).
We will continue to share more interesting content around blockchain and cryptocurrencies in the upcoming articles.