The wallets, purses or wallets of Bitcoin, other cryptocurrencies and crypto-assets store the private keys that are needed to access the balances registered in an address or public key of the corresponding blockchain and be able to spend them. Currently, there are several types of cryptocurrency wallets that can be categorized using two variables: ease of use and security.
The pyramid also represents the adoption in the use of each type of portfolio: those at the bottom are widely used, while those at the top are not as widely used; a mixed condition of the crypto wallet ecosystem, given the fact that it is money that we are dealing with. Security is a determining factor for a good crypto asset portfolio.
Starting at the bottom of the pyramid, there are the exchange houses, which act as a cryptocurrency bank: users enter their cryptocurrencies at an assigned address and the "bank" is in charge of managing it for them, that is, they move the users' money to one or more central wallets and from there they carry out the payment, purchase or sale instructions that their clients indicate. They are useful for the exchange between crypto-assets and fiat currencies. However, these services are prone to hacking, scam, service outages and other risks, so that users' money may be unavailable or simply disappear; In addition, they tend to change the conditions of use at their sole discretion, causing account closures and other inconveniences to users.
Some exchange services are Coinbase, Poloniex, Bittrex, Xapo, Bitfinex, Bitstamp, LocalBitcoins, and many others.
Exchange houses represent a business that allows the meeting between the real world (physical currencies) and the digital one (cryptocurrencies), although there are also between crypto-assets. Users who store their savings in these services run the risk of losing their money. With the development of Bitcoin technology, advancements such as Atomic Swaps will make its use unnecessary in the future.
One step further up the pyramid are online wallets: websites that allow users to mobilize their money independently, having exclusive control of their private keys and without having to install any software. In this type of purse (and in the next two of the pyramid) an abstraction of the private key is generated in the form of 12 or more words called a seed or backup that must be noted by the user on paper or another resistant medium and outside of the line, in order to safeguard your money.
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In online wallets, the probability of hacking users' funds is drastically reduced, even so, it is not zero, since a hacker could install some malicious code on the website and steal the seeds of the users who access the page. The unavailability of funds continues to be a problem in these wallets, as they can suffer from temporary drops for various reasons.
In the penultimate step of the pyramid are the portfolio applications: software that can be installed on computers and / or mobile devices and serve as an interface to view balances at the addresses that the user has and mobilize money in them. They can generate a new seed or use a previously created backup, as well as allow the activation of extra code or key, at the software level, to mobilize the money.
These applications eliminate the problem of unavailability of money (unless the device is damaged or the software is not nearby) and fully transfer responsibility for security to the user, who must keep their device virus-free, refraining from entering insecure pages, to connect to free Wi-Fi networks and to insert any unknown peripherals, such as pen drives or external hard drives, in the system.
Examples of wallet applications are Exodus, Jaxx, Electrum, Mycelium, Coinomi, and Bitpay.
At the top of the pyramid are hardware wallets, also called cold wallets: physical devices that house the private key of associated offline accounts, allowing transactions to be signed without exposing the seed. These wallets are similar to a pen drive, they connect via USB to the computer and represent the safest way to protect crypto assets. These devices allow you to send cryptocurrencies even in insecure environments, such as other people's computers.
Essential features of a cryptocurrency wallet
Control over money: cryptocurrency wallets can allow individual management (only the user owns the private keys), joint management (the owner and the company have private keys), or by a third party (the company owns the keys private) of the money stored in them. Depending on the control over the management of the money that is chosen, the responsibility and control of the user and the security of the funds in the portfolio increases or decreases.
Validation: cryptocurrency wallets can use complete validation (full node, download the entire blockchain), simplified validation (simple node, only download the block hashes), or centralized validation (full node) to validate transactions. from a third party). Based on the type of validation that the wallet uses, it should or may not be trusted that a third party performs the correct validation of the transactions made.
Transparency: cryptocurrency wallets can be completely transparent (the application code can be audited and verified by the user), transparent (the code can be audited, but cannot be verified by the user), or not at all transparent (the code the application is closed and the application is run remotely). Depending on the degree of transparency, the user will have to trust more or less than the application developer did not add secret or malicious codes that could cause them to lose their funds or be stolen.
Environment: cryptocurrency wallets can be installed in vulnerable (virus-prone) environments with or without two-step authentication, secure environments (such as cell phones where applications are isolated), and highly secure environments (such as physical cryptocurrency wallets, gadgets). Given the type of environment used, the user must activate mechanisms such as two-step authentication and place complex passwords on their wallets and devices to avoid the loss or theft of funds.
Privacy: cryptocurrency wallets may or may not reveal information about their users to network nodes (such as the IP address), re-use or not the wallet addresses with each payment, and allow or not the use of the Tor browser to prevent other people or companies from associating transactions with the user's IP address. Depending on the type of privacy that the wallet provides, the user must be more or less attentive to the information it reveals to the network.
Shishir is a guest blogger, having his blogs published on various sites including Huff Post. He loves to watch documentary movies and travel across different countries to explore new places. Moreover, He is Google AdWords & Analytics certified partner having more than 9 years SEO & Digital marketing experience.)