Cryptocurrency wallets are the bridge that allow us to manage our cryptocurrencies. A piece of software or hardware with which to perform the reception and sending operations through the blockchain network of each cryptocurrency.
One of the most important elements in the world of cryptography and blockchain technology are wallets. The use of these tools is essential when managing our cryptocurrencies. That is why choosing a suitable one that meets our needs is as important as having one. For this reason, in this article we will share the most important and fundamental information you should know to understand what wallets are and how they work.
The term walletrefers to a wallet, wallet or virtual wallet in which we can manage our crypto assets. It is a software or hardware designed exclusively to store and manage the public keys andprivate keysof our cryptocurrencies.
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How do cryptocurrency wallets work?
As we already mentioned, wallet or cryptocurrency wallets are one of the most important and indispensable elements when it comes to operating with these. This is because they are the ones that allow us to send or receive payments in crypto assets.
Unlike the traditional financial system, Bitcoin and other cryptocurrencies are fully digital currencies that do not exist in the physical world and that work based on cryptography. Therefore, the design of the wallets is of vital importance to be able to operate and manage our funds. And although, the term wallet seems similar to the one we use to store our physical money, the truth is that in cryptocurrencies, what is really stored in wallets are public and private keys.
Cryptocurrencies as such do not exist as currencies, but rather as records of transactions contained within a blockchain that is operated by interconnected nodes around the world. So, the public keys and above all, the private keys within a wallet are what give us ownership and right over the cryptocurrencies transferred to a particular address. Let’s look at this in more detail:
- The public key is similar to a bank account number. We can give it to anyone to send us money, without the risk that you can withdraw our funds. Through the public key, addresses are generated to receive, consult and view the status of our funds.
- The private key works as a kind of key, a PIN or password that we should not reveal to anyone, since it gives us the right to spend the cryptocurrencies contained in an address. Thus, the owner of the private key will be the owner of the funds and will have full control over them.
Wallets use advanced blockchain encryption techniques to grant and ensure total security to users. In this way the wallet can save, send and receive cryptocurrencies without major risk.
When setting up a wallet, the first thing is to create a private key using a secure algorithm. For example, through the ECDSA algorithm using the elliptic curve secp256k1. Or the EdDSA algorithm can also be used. In either case the goal is to provide a high level of security. This is thanks to the fact that both methods allow the creation of almost infinite combinations with a high degree of difficulty. This makes them virtually impossible to guess or be forcibly attacked.
After the generation of the private key, we proceed to the creation of the public key, which is mathematically related to the first. And from the public key the addresses where we can receive cryptocurrencies are generated. However, it is important to note that even if the public key is generated and related to the private key, the reverse process cannot be done. That is, we cannot deduce the private key from the public key, since the algorithm used for creation is unidirectional.
Likewise, there are deterministic wallets (HD wallets) that at the time of configuring them for the first time, generate a seed or seed. From which all keys and addresses are generated. Later it will help us to restore, recover the wallet and our funds in case of damage or loss of the equipment. These seeds are a kind of code that is represented by mnemonic words usually in English. In order to provide greater ease when making backups.
As a curious fact, it is important to note that both public and private keys generated in a wallet are not related to the cryptocurrency protocol. If not rather, take shelter inside the hardware that operates them and never leave the device. However, the level of security provided by a wallet will depend on the type that is being used, be it a hardware wallet, paper wallet, light wallets, software for desktop,tabletorsmartphone,or online.
Usefulness and importance
As bitcoin and other cryptocurrency systems are completely decentralized, there is no entity or body that controls them. That is why wallets play a very important role in this ecosystem. They are a piece of basic infrastructure that allow us to operate with cryptocurrencies. In them we can see and consult our balances, in addition to the operations carried out and received. They also allow us to trade our funds with absolute control over them. We do not need the permission or authorization of any third party to perform an operation.
In addition to providing us with security and confidence to carry out our operations, wallets also allow us to sign transactions without the need for private keys to leave the device. When we make a shipment to a person, we are transmitting a value in the form of a transaction. Therefore, we are transferring ownership of a certain amount of money to that person. In order for the network to confirm such a transfer and the recipient to be able to use the funds, a digital signature is necessary. This will prove that the person carrying out the operation owns the funds and not a third party.
Are cryptocurrency wallets the simple and secure way to make use of our cryptocurrencies?
Cryptocurrency wallets were created in order to facilitate the process of using and managing our coins, at all times.
Before trading with a wallet for our cryptocurrencies it is necessary to know the types that are available in the market. Study the advantages and disadvantages offered by each of them, to determine which one best suits our needs.
With the creation of Bitcoin and subsequently the development of many other cryptocurrencies, the need arose to own a wallet that would allow us to operate digital money. And to choose the one that best suits us, it is necessary to study the available projects. The first of these developments led to the creation of full wallets or full clients. These are the most complex wallets and also one of the most secure in the world of cryptocurrencies.
Cold wallets, hardware or paper type, are undoubtedly those that provide a higher level of security when it comes to protecting our funds. Since they operate offline and therefore, there is no risk of them being hacked or hacked. Becoming ideal and preferred by many to deposit large sums of money. The best known hardware wallets are the Trezor and the Ledger, choose the one that best suits your security and price needs. On the other hand, hot wallets, such as desktop, tablet or smartphone wallets are better for daily operations. Due to its condition of always being connected to the blockchain, and therefore, to the Internet being more susceptible to computer attacks.