What is a cryptocurrency wallet and how does it manage digital currency?

Cryptocurrency wallet development services are a rage these days. Let’s understand what they are.

A cryptocurrency wallet is a piece of software that is used to store and retrieve digital assets for a user. It can store secret keys that are used to digitally sign transactions for blockchain distributed ledgers. Therefore, users can add cryptocurrencies like Bitcoin to their wallet and use it to make transactions. However, their future is predicted to go far beyond being just a keeper of physical public or private keys and cryptocurrencies. Cryptocurrency wallets could one day represent an individual’s professional and financial status, or even confirm their personal identity as they are the only way to prove ownership of digital assets.

A number of cryptocurrency wallet development companies are flourishing and creating a range of crypto wallets that are essential cogs in the cryptocurrency ecosystem.

How does a cryptocurrency wallet work?

A cryptocurrency wallet could be a software available on a personal phone or a physically separate device altogether. It makes use of the blockchain technology to safely and securely store an individual’s crypto assets as well as tokens, and facilitate the process of sending and receiving them. The crypto wallet, or the digital wallet, not only keeps track of the encryption keys that are used to digitally sign transactions, but also stores the address on the blockchain where a particular asset resides.

Types of Wallets

Cryptocurrency wallets can be broadly classified into two main types of wallets:

• Hardware Wallets (or cold storage wallets)
• Software Wallets (or hot storage wallets)

Hardware wallets provide a perfect balance of safety and convenience when storing digital assets. They can be downloaded and reside offline on a device which could range from a USB device to a smartphone.They can even be purchased as a separate device with the software already installed on them. They are not connected to the internet and enable users to store their assets offline. The funds in the wallet can be received at any time. However, any transaction can be signed with a private key only once the wallet is disconnected from the network. This step is an added security that allows users to hide their private key from the internet. The most important feature of a hardware wallet is that it is designed to protect an individual’s private keys from online hackers.

Since the private key of the offline wallet never leaves the device, it cannot be accessed by hackers. If the cold wallet gets lost or endures physical damage, the owner can access his digital assets from a new device by using the unique recovery seed words.

Software wallets or hot wallets are easily accessible via the internet and are further divided into online wallet and client-side wallets that are managed locally on a user’s handheld device or computer. Cryptocurrency software development companiesassist in building the complex software behind the smooth running hot wallets.

Hot wallet vs. cold wallet: which one is more secure?

Owing to its innate qualities, a cold storage wallet is relatively more secure than a hot wallet as it is not connected to the internet – thus cutting off the main source for hackers to hack the system. Hackers target online wallet services and transfer the secret keys to a wallet to their own wallet, thus transferring all the digital assets associated with that wallet to their own. A number of thefts costing the victim millions of dollars worth of cryptocurrency have occurred in the past, and they have all been through online channels.

How to bolster crypto wallet security?

There are various ways suggested for securing a crypto wallet. One is to convert cryptocurrency into Fiat money in some currency for safe keeping. Another way is to store crypto keys in a cold wallet, making a paper copy of the keys, and then storing the paper key in a secure place such as a bank vault. A user can make use of paper as a type of software enabled wallet that creates a QR code, which can be scanned to carry out blockchain transactions. An online exchange service which enforces a two-factor authentication is another method of improving security. Push technology can be used as a mediator in this case as it binds one of the factors to the owner’s mobile device. The mobile device can therefore be used to approve access request made by the wallet’s authentication service.

There are several ways of mitigating cyber attacks on cryptocurrency wallets, but the best bet is to use any kind of hardware wallet or a hard copy backup where the secret keys can be kept safely. Since the wallet contains small yet highly sensitive data, a higher level of security is required to defend its contents against hackers.

Other uses of crypto wallets: going beyond digital currency

While the most important application of a cryptocurrency wallet is storing cryptocurrencies like Bitcoin, Ripple, Litecoin, Ethereum, etc., its software can also be used to store the keys to other digital tokens such as financial assets, securities, bonds, contracts, and services.

For instance, a digital wallet can be used to store a plane ticket, unique creatives, and any other goods that have a digital value associated with them. As they make use of a decentralized consensus mechanism, digital encryption key ensures that any transaction is made possible with a digital signature.

Digital wallets can find application in supply chain as well as transactions and assets can be easily tracked and traced. Cryptocurrency wallets are helping the world move towards a transparent global economy where every piece of information of an individual – professional history, tax information, medical information, preferences, etc. – can be shared with any other individual with mutual consent.

Digital wallets can also carry personal identity documents such as driver’s licenses, passports birth certificates, medical history, social security cards, voter registration, and more.

All these applications, apart from the financial aspects, are making digital wallets even more valuable. We are slowly inching towards attaining a completely digitized world where information is accessible at the touch of a button.