A wallet is like a bank account.
To hold and transfer specific cryptocurrencies, you need to have a wallet and an account inside of the wallet.
A wallet account enables you to check your balances and to send and receive transactions of the cryptocurrency of your choice.
Your wallet is what connects you with each specific blockchain and provides you full access to your funds.
Depending on how the wallet is programmed, it can connect you with more than one blockchain network.
What happens when you open a wallet account?
When you open a wallet account, a private key is generated.
Your most important asset is your private key!
If you don’t protect your private key, then you can forget about your valuable cryptocurrency.
What is the private key?
The private key is like the primary password of your wallet account.
When a wallet account is created, the wallet program assigns a new private key to it.
The method used to keep your private key safe will depend on the type of wallet you choose for connecting with the blockchain network.
The private key is what signs off the ownership of your cryptocurrencies to other wallets.
There are many different wallets you can choose from, to open an account:
They are usually classed as either a hot or a cold wallet.
Hot - Wallet accounts that have your private key saved online.
- Software wallets (web, desktop and mobile versions)
Cold - In this case, your private key is stored offline.
- Hardware wallets
- Paper wallets
Wallets can be centralized or decentralized.
Centralized wallets are like your online bank account.
Decentralized wallets are like digital safes.
Centralized
- You do not have access to your private key. In this case, you entrust your funds to a company of your choice (that created your wallet) to hold it on your behalf.
- When you open a centralized wallet, you will most likely be prompted to complete steps similar to opening an online bank account. You will choose your login credentials, create a profile and be asked to complete a KYC authentication (to prevent money laundering among other reasons).
- You will not have access to your private key. Your funds will be the responsibility of a third party — your wallet provider. In exchange, this option gives you the ability to restore your login credentials in case of loss.
Suffice to say. It is best to do thorough research on your wallet provider before entrusting your funds to them.
Decentralized
- You have complete control of your private key. In this case, you are responsible for its security. Losing it means losing your funds.
Save it for dear life!
When you open a decentralized wallet, you will be prompt to:
- Create and copy a mnemonic phrase (a set of 12 or more words created in a specific sequence that must be copied and saved as displayed). In some cases, depending on your wallet provider, a mnemonic phrase can be used with a password to access your wallet account.
- Or, You will be prompt to choose a password that will be encrypted with your new private key. This encryption creates the Keystore file (the encrypted version of your private key + a password of your choice). This file is then used in combination with your password to access your wallet account.
- In both cases, you have access to your private key and must keep it safe at all times.
- The private key and credentials of your account are your sole responsibility. You must ensure they are kept secure and offline. Login credentials cannot be recovered if lost.
As you may have noticed, up to this point, no private key was ever directly presented to you. This is because your private key is created and assigned to your wallet account by the wallet program. Everything is done in the background.
Your private key is kept inside your wallet and can be accessed once you have logged in.
The best practices to keep your decentralized software wallet safe are:
- To store your Keystore files offline, (think external hardware, for example).
- Or, to create a paper wallet, you can write ✍🏻 your public and private keys, together with your login credentials on a piece of paper. Make sure to store it in a safe place.
The most important rule?
Do not share your private key 🔐
(Think of it as your primary bank account password)
Please keep it safe!
We hope this was a helpful post to you.
Are there any topics you would like us to cover?
Share your thoughts 💭 in the comments below.
See you in the next blog.