Crypto Wallets – The selection of a suitable cryptocurrency wallet directly impacts the security, accessibility and overall control a user has over their crypto assets. This guide explores all crypto wallet categories to equip users with the knowledge necessary to make informed decisions.
The Main Types of Crypto Wallets
Custodial Wallets
Custodial wallets offer a user-friendly approach to storing cryptocurrency by entrusting the management of private keys to a third-party service provider. Private keys are similar to unique and complex passwords that provide access and control over a user’s cryptocurrency holdings in their wallet. The main advantage of custodial wallets is their ease of use. However, there is an element of trust that comes at a price for this convenience. Users have to rely on the custodian’s robust security measures to protect their assets since the vulnerability can cause the funds leakage. After all, for hackers, a place where multiple private keys to different wallets are stored is potentially a much more attractive target than an individual user’s wallet.
On the one hand, trusting private keys is beneficial in the case that it will always be possible to restore access to the account. However, it should be noted that an account managed by a third party can be blocked for different reasons, including requests from authorities. Additionally, using custodial wallets require Know Your Customer (KYC) procedure, which can introduce a time delay during the account setup process. Centralized cryptocurrency exchanges, often offering embedded wallets as part of their platforms, are the most common providers of custodial wallets.
Self-custody Wallets
Self-custody wallets, also called non-custodial, provide users with full control over their private keys and, consequently, their funds. There is no central authority control and therefore, no organization can access and use traders’ data or assets. Also, users’ assets remain always available – as they are stored in users’ wallets, no exchange or other third party has access to them. While this autonomy significantly enhances security, it also suggests the responsibility for safeguarding private keys entirely on users. Therefore, losing private keys and recovery phrase (seed phrase), which is used to gain access to a wallet or import it, may result in loss of access to crypto. However, these wallets do not require a lengthy KYC procedure, so traders remain anonymous since users don’t give up personal information.
Interaction With Web3
In decentralized finance (DeFi), self-custodial wallets are prevalent since decentralization emphasizes the elimination of intermediaries itself. Most wallets are designed to interact with Web3, allowing users to connect to decentralized apps (dApps). So for users looking for swapping on various platforms, engaging with DeFi protocols for lending, borrowing, providing liquidity or staking, Web3 wallets would be the right choice. Still, additional features worth considering could improve the overall Web3 experience. For example, multichain support enables interacting with different blockchains and accessing various tokens. And advanced security measures should include biometric authentication, regular updates and scam protection features.
Hot and Cold Storage
Wallets can come in software (hot) and hardware (cold) forms. Software wallets are accessible as mobile, desktop or web wallets (extensions).
Hardware wallets, which are physical devices resembling a USB memory stick, store private keys offline, making them among the safest options for storing large amounts of cryptocurrency. Still, a cold storage means Hardware wallets, devices resembling USB memory sticks store keys offline making them one of the safest options for storing significant amounts of cryptocurrency. However, using cold storage means being unable to carry out transactions on the device. To manage crypto assets, a user connects a hardware wallet to an internet-enabled wallet and signs a transaction offline, ensuring that private keys never leave the cold wallet.
Conclusion
For those inclined towards the self-storage model, a combination of hot and cold storage options can provide a balance between security and convenience. Hot wallets offering advanced Web3 functionality allow for seamless interaction with dApps. For example, the 1inch Wallet facilitates navigation in Web3, as well as hardware wallet support, such as Ledger. Choosing a cold storage option prioritizes security, but a Web3 wallet is a must for managing transactions in the DeFi space.