This is part four of a six-part Welcome to Crypto series, which will cover everything from the advantages of digital assets and how to buy crypto to how to read cryptocurrency price charts, and why they matter.
MakerDAO’s popular decentralized stablecoin, Dai, allows people everywhere to unlock the true value of cryptocurrency and eliminate price volatility. As more and more users recognize the huge potential of Dai on the blockchain, we get closer to a world in which crypto is viewed as far more beneficial than it is mysterious. While it’s true that times are changing when it comes to financial options, what won’t change is the need to keep track of and safeguard assets,
Enter crypto wallets.
There are various crypto wallet types available, and each deserves individual examination.
Crypto Wallet Types Hold The ‘Key’
Crypto coins and tokens are digital assets; therefore, they don’t exist in physical form and cannot be “stored” in a physical wallet or anyplace else. A crypto wallet is a piece of software that someone uses in order to access the private key (see below) necessary to transfer ownership of their cryptocurrency. It serves as a tool to manage these assets and to interact with decentralized apps (dapps), including Oasis Borrow, one of several interfaces that permit users access to the Maker Protocol, where they can generate Dai. In a crypto wallet, you can see a list of your coins and tokens, view your balance and transaction history, and make transfers.
No matter what type of crypto wallet you choose, you are assigned a public address on a blockchain, as well as a private key. Every time you do anything with your crypto (e.g., buy, sell, spend, or transfer it), the transaction is recorded on the blockchain ledger and your public address is attached for all to see—forever. Your private key, on the other hand, is just that: private. It is also unique—similar to a fingerprint but digital—and used to “sign” your transactions. As such, it should never be shared.
Because no bank or any third party is involved in your crypto transactions, you alone are responsible for safekeeping your private key. There’s no support network to call if you lose it and no “genius counter” to visit for help. While crypto wallet developers are beginning to offer private key backup options, most still provide users with an all-important seed phrase to input should you lose your private key or the wallet be compromised or lost. If you lose your seed phrase, you run the risk of losing your private key and, therefore, the ability to transfer ownership of your crypto.*
*Note that a wallet owner uses his wallet to transfer ownership of cryptocurrency, but not to transfer the cryptocurrency itself because cryptocurrencies are simply software, and not tangible items that can be transferred.
While your crypto wallet is a powerful first line of defense against theft, your crypto assets are only as safe as the locations of your private key and seed phrase.
Making Sense of Crypto Wallet Types*
Crypto wallets fall under two broad categories: hot and cold. Hot wallets, so named because they are connected to the internet most of the time, include mobile, desktop, and browser types. Cold wallets include paper wallets, which are never “hot,” and hardware wallets, which are only connected to the internet when in use. Each wallet type has specific advantages, so you’ll want to choose the one that best meets your security and performance needs.
*Recent regulatory guidance also focuses on the difference between “hosted” and “unhosted” wallets. Readers should understand that wallets where user funds are controlled by third parties (e.g., wallets accessed through an exchange) are called “hosted wallets,” whereas wallets allowing users to exercise total independent control over their funds (e.g., MetaMask) are called “unhosted wallets.”
Hot Wallet Types
- Mobile Wallets. Mobile wallets have become the go-to wallets for crypto newcomers, largely due to convenience, but also because new users are likely to keep small balances as they learn the crypto landscape. The “hottest” of all hot wallets, mobile wallets present security concerns: a smartphone is almost always connected to the internet and susceptible to viruses, and it can be lost or stolen. With a mobile wallet, your private key is only as secure as your phone. While there are a few niche mobile wallets that will run on a mobile browser, the vast majority are app-based.
- Desktop and Browser Wallets. Like mobile wallets, desktop and browser wallets are easy to use, but they are accessed on desktop and laptop computers via browser extensions. Importantly, these wallets cannot necessarily be accessed by mobile browsers. While laptops and computers are harder to steal than mobile phones, they, too, are susceptible to viruses and are only as safe as the device’s security system.
Cold Wallet Types
- Hardware Wallets. Hardware wallets are physical appliances that connect to a computer, laptop, or mobile device via a USB cable or Bluetooth. While owners of these wallets do lose some flexibility of use, it’s not a large concern because they generally transact less frequently than, for example, day traders, who rely heavily on wallet convenience.
Hardware wallets offer improved security because they are only “hot” when connected to a device. To sign a transaction using a hardware wallet, you must manually unlock your private key by entering a passcode on the device. So, while a mobile or desktop wallet can be hacked by bad online actors, a hardware wallet can only be compromised physically. Be sure to always store it in a safe and secret place when not in use.
- Paper Wallets. Used mainly by advanced users, paper wallets are the iciest of cold wallets and seen as the most secure since they are invulnerable to online attacks. Never connected to the internet, a paper wallet is literally a piece of paper with a public and private key printed on it, typically in QR code form. To make transactions, users simply scan the codes. A paper wallet should be stored in an extremely secure location.
Choosing the Perfect Crypto Wallet(s) for Your Needs
There’s no limit to the number of wallets you can use, but it’s probably best to begin your crypto journey with just one. As time goes by, though, you’ll discover that different wallets can be used for different occasions—and that not all wallets support all blockchains.
A Wallet for Every Occasion
Some people use a cold wallet to manage large crypto balances and a hot wallet to manage smaller ones. When necessary, they even switch between both. For example, If you’re away from your hardware wallet and need to make a large transaction in a hurry, you might do so using a hot browser wallet, and then sweep the balance into your more secure cold wallet later.
Additionally, different blockchains require different public addresses, and not all wallets can support tokens from different blockchains. For example, Bitcoin is on the Bitcoin blockchain and Dai is on the Ethereum blockchain. So, if someone wanted to send you 1 Bitcoin and 1 Dai, they would send those amounts to two different public addresses. If your wallet doesn’t support tokens from both blockchains, you would need to use two different wallets.
Single-Use Burner Wallets
Finally, burner wallets offer users a simple and fast way to exchange small amounts of cryptocurrency using a mobile device. Often at Maker events, burner wallets are pre-loaded with small amounts Dai and given to attendees. The single-use wallets are great for allowing new users to experiment with Dai and buy items from vendors at events.
Crypto Wallets Spur Financial Freedom
The specific features of wallet types will drive your choices, especially as your crypto journey changes over time. Sure, crypto wallets can be a bit confusing to new users, but riding the learning curve is worth it given the role wallets play in providing users with more financial freedom and economic opportunity.
Once you’ve got your wallet, you can get Dai on an exchange, such as Coinbase, generate your own Dai by creating a Maker Vault, and then earn on the Dai you hold by locking it into Oasis Save.
Next up in the six-part Welcome to Crypto series: How To Buy Cryptocurrency: A Step-by-Step Tutorial
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. Charts, graphs and references to any digital assets are for informational and illustrative purposes only.
Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any purchase decision. The content speaks only as of the date indicated.