Understanding different types of crypto wallets
In the physical world, wallets store cash, photographs, cards, government IDs, bills, notes and a lot more. In some essence they store your identity along with your money.
Similarly in the web3 world, wallets are a form of carrying your assets as well as your digital identity. Wallets are required for decentralized applications to interact with them as they become your identity. They are the first interaction point for anyone getting into this space and they can be used for more than just storing assets. They also open up the possibilities of interacting with a whole suite of dApps on various chains.
As you can see wallets are an important part of the decentralised ecosystem and everyone wants to own a piece of it. There are a huge number of digital wallets out there with different features and functionalities and it is important to understand the best kind of wallet for your use case.
Public and Private keys are an integral part of completing a transaction on the chain without the need of a third party to verify the transactions. The public and private keys fit together as a key pair. A public key allows you to receive cryptocurrency transactions. It’s a cryptographic that’s paired to a private key. While anyone can send transactions to the public key, you need the private key to “unlock” them and prove that you are the owner of the cryptocurrency received in the transaction. Private key is an astronomically large number that gives you the ability to prove ownership or spend the funds associated with your public address. Private keys are stored in your wallet.
Based on this there are 2 major types of crypto wallets out there.
- Custodial Wallets:- Wallet in which the private keys are held by a third party. For ex:- Free Wallet, Binance, BitMex, Bitgo, Blockchain.com, CoinBase,WazirX.
- Non — Custodial Wallets:- Wallet in which the private keys are held by the users themselves. For ex- Metamask, Rainbow, Phantom, Trust Wallet.
Wallets are often host to a lot of attacks and it is necessary to keep them safe to avoid giving your private keys to someone else. Based on this wallets can be classified as below:
- Hot Wallets:- A Wallet that is always connected to the internet
— Desktop Wallets:- Hot Wallet in which users have to download an application on their system to use. Ex- Mycelium, Electrum, Exodus
— Web Wallets:- Hot Wallet in which users can use the wallet with an extension on the browser. Ex — Metamask, Phantom, Coinbase
— Mobile Wallets:- Hot Wallet in which users have to download an application to use the wallet. Ex- Trust Wallet, Edge, Coinomi
- Cold Wallets:- A wallet that is not connected to the internet and crypto is stored offline on a hardware device.
— Paper Wallets:- Piece of paper that has all the instructions written to access your cryptocurrency.
— Hardware Wallets:- Hardware wallets save private keys on a physical device in an offline environment and work like a flash drive. Ex- Ledger, Trezor, Steel, SecureX
Apart from the above major types of wallets out there, there are other various types of wallets based on the chain and some additional features.
- Multisig Wallets:- A wallet that requires more than one private key to sign and authorize a crypto transaction Ex- Armory, bitgo, bitalo, blocktrail
- MPC wallets:- an MPC wallet is a wallet where the private keys and their control are divided between several devices. This means that the private keys for the wallet are divided and stored in multiple devices for additional security. Ex — Zengo, Sepior
- Smart Contract Wallets:- These wallets hold your assets in a smart contract that exists on the chain which gives more control over your assets and prevents withdrawal of funds unless specified by the code. Ex — Argent, Portis
- Single chain:- A single-chain wallet is usually designed and developed to serve one public-chain platform like Ethereum. Ex- Metamask,Phantom
- Multi-Chain wallet:- A multi-chain wallet is a wallet that supports or can hold multiple public-chain digital assets at the same time like Ethereum and Solana. Ex — Trust wallet, Zerion, Zengo
Apart from the above mentioned wallets, there are some more types which differ by a very small functionality from the above ones. It is necessary to choose the right wallet based on your use-case and remember to never share your keys with anyone.
Obvious is building a wallet aggregator that works with all of these wallets to provide a seamless transfer of liquidity across various chains and exchanges. Join the waitlist to get access to the app now.