What is a digital wallet?

Introduction

Digital wallets are the tools used to "store" cryptocurrency and digital assets such as NFTs. There are also physical hardware wallets, also known as "cold storage", but for the purposes of this article, we will solely focus on digital wallets. In order to participate in digital asset trading/collection/etc., you need a digital wallet with which you can store your assets.

Non-Custodial digital wallets such as Metamask and Trust Wallet lead the pack in providing up-to-date technology to connect to dApps (decentralized applications), to "store" your crypto, and own your private keys. Although there are many other options, these two digital wallets are accessible and powerful tools to get started.


How do cryptocurrency wallets work?

Contrary to popular belief, crypto wallets don't truly store digital assets. Instead, they provide the tools required to interact with a blockchain. In other words, these wallets can generate the necessary information to send and receive cryptocurrency via blockchain transactions. Among other things, such information consists of one or more pairs of public and private keys.

The wallet also includes an address, which is an alphanumeric identifier that is generated based on the public and private keys. Such an address is, in essence, a specific "location" on the blockchain to which coins can be sent to. This means you can share your address with others to receive funds, but you should never disclose your private key to anyone.

The private key gives access to your cryptocurrencies, regardless of which wallet you use. So even if your computer or smartphone gets compromised, you can still access your funds on another device – as long as you have the corresponding private key (or seed phrase). Note that the coins never truly leave the blockchain; they are just transferred from one address to another.

What options do I have?

Digital wallets come in three primary forms, each with their own benefits and drawbacks. Most software (digital) wallets you will encounter will be web wallets, desktop wallets, or mobile wallets.

Web wallets access blockchains through a browser interface without having to download or install anything. This includes both exchange wallets and other browser-based wallet providers. In most cases, you can create a new wallet and set a personal password to access it. However, some service providers hold and manage the private keys on your behalf. Although this may be more convenient for inexperienced users, it's a dangerous practice.


If you don't hold your private keys, you're trusting your money to someone else. To address this problem, many web wallets now allow you to manage their keys, either entirely or through shared control (via multi-signatures). So it's important to check the technical approach of each wallet before choosing the most suitable for you. When using cryptocurrency exchanges, you should consider making use of the protection tools available.


Desktop wallets are software you download and execute locally on your computer. Unlike some web-based versions, desktop wallets give you full control over your keys and funds. When you generate a new desktop wallet, a file called "wallet.dat" will be stored locally on your computer. This file contains the private key information used to access your cryptocurrency addresses, so you should encrypt it with a personal password.


If you encrypt your desktop wallet, you will be required to provide your password every time you run the software so that it can read the wallet.dat file. If you lose this file or forget your password, you will most likely lose access to your funds.


Thus, it's crucial to backup your wallet.dat file and keep it somewhere safe. Alternatively, you can export the corresponding private key or seed phrase. By doing so, you will be able to access your funds on other devices, in case your computer stops working or becomes inaccessible somehow.


In general, desktop wallets may be considered safer than most web versions, but it's crucial to make sure your computer is clean of viruses and malware before setting up and using a cryptocurrency wallet.


Mobile Wallets function much like their desktop counterparts but are designed specifically as smartphone applications. These are quite convenient as they allow you to send and receive cryptocurrencies through the use of QR codes.


As such, mobile wallets are particularly suitable for performing daily transactions and payments, making them a viable option for spending Bitcoin, BNB, and other cryptocurrencies in the real world. Trust Wallet is a prominent example of a mobile crypto wallet.


Just as computers, however, mobile devices are vulnerable to malicious apps and malware infection. So it's recommended that you encrypt your mobile wallet with a password, and backup your private keys (or seed phrase) in case your smartphone gets lost or broken.


Wish to create a digital wallet?

Click here for a guide to creating a digital wallet with Metamask

Click here for a guide to creating a digital wallet with Trust Wallet




(Credits: Binance Academy)

Updated on: 23/08/2023