currency wallet) The electronic interface to a user's cryptocurrencies and other digital assets such as NFTs. A crypto wallet is either a browser extension or a mobile app that allows people to buy, sell, swap, lend and borrow cryptocurrency coins and tokens. Wallets enable users to access a decentralized exchange (DeX), which provides a variety of trading opportunities (see crypto exchange
). Wallets can also be in hardware, which is safer than a software wallet (see image below).
Wallets Are Like Debit Cards
A wallet does not hold the crypto. It maintains the private cryptographic keys to access the assets that reside on the blockchain. Unlike a physical wallet that holds cash, a crypto wallet functions like a debit card that provides access to the funds; however, it cannot only send, it can receive.
Non-Custodial - Hierarchical Deterministic (HD)
Installed in the user's computer, tablet or phone, most crypto wallets today are HD wallets. They derive the private keys from a randomly generated "seed" created at startup, which is 12 to 24 everyday words (see image below). The private keys generate the public addresses that are visible to everyone (see block explorer
The HD wallet creates the private keys in a hierarchical tree, and the different branches can be used for accounting purposes. The seed words must be written down and kept safe because they become the "recovery phrase" to regenerate all the keys if the wallet were ever destroyed. Millions of dollars in crypto have been lost because people did not back up their keys.
Non-Custodial - Nondeterministic
Using random numbers and known as "just a bunch of keys" (JBOK), this earlier approach generated a private key for each transaction, and each key had to be backed up. See Bitcoin wallet
, crypto wallet address
Custodial - The Alternative
In contrast to self-managed wallets, users can open an account with a centralized exchange (CeX) such as Coinbase or Binance and buy and sell crypto similar to how people use Fidelity, Vanguard and other brokers to buy and sell stocks and bonds. In this case, the exchange is the custodian of the crypto assets, and the financial options are limited to that centralized exchange. See crypto exchange
A "Cold" Crypto Wallet
A Paper Wallet
Like every hardware wallet, The Ledger Nano S HD wallet cannot be hacked when offline. At startup, 24 everyday words are generated as the seed to create the private keys (top). If the device is ever lost or destroyed, the words are used to recover the keys. See cold wallet
This paper wallet was generated from a Bitcoin ATM, and its QR codes can be scanned to import the coins into a digital wallet app or make another ATM transaction. The private key is used to send coins and the public key is used to receive them. See Bitcoin ATM