A crypto wallet, similar to a bank or brokerage account, custodies your assets. Bank accounts have account and routing numbers, brokerage accounts have usernames and passwords. In the case of a crypto wallet there is a public and private key that maps to your account. A crypto wallet is used to secure and store these keys. These keys allow you to access and use your crypto assets on a blockchain. Wallets make it easier to interact with blockchain networks by hiding much of the technical complexity. They allow you to send, receive, trade, and use your assets without needing to write code or understand how the blockchain works behind the scenes.
You could submit a transaction directly to a blockchain using code, but a wallet provides a simple and friendly interface to do the same thing. In this way, wallets act as a bridge between people and blockchain networks. Similar to a regular wallet that holds multiple cards for different bank accounts, a crypto wallet can hold multiple private keys, each giving access to a different account.
Key concepts
- •Custody: Holding or guarding something. In the context of blockchains this is the act of holding and securing assets. For example, your bank custodies your assets on your behalf.
- •Cryptography: A set of mathematical techniques used to secure information and prove things about information.
- •Hashing: A process that takes any input (a sentence, a file, a list of transactions) and produces a fixed-length output called a hash. Even tiny changes in the input produce completely different hashes, but the same input always produces the same hash.
- •Public Key: The publicly accessible address associated with a blockchain account. Someone can send assets to you using this key.
- •Private Key: This is like your password for your crypto account. This is how you take actions involving your account. Without a private key you can't take any actions for an account.
- •Transaction: A transfer of goods, services or assets between two parties. With respect to blockchains a transaction is the action you take to change the current state of your wallet. This might be reducing your balance by sending money or exchanging one asset for another by trading.
- •Seed Phrase: A list of 12 or 24 words that can be used to access your wallet. This is a human readable format of your private key.
Why are crypto wallets important?
Blockchains are powerful tools for holding and moving assets, but that power comes with complexity and risk. Crypto wallets simplify this complexity while helping users access blockchains safely. The most important role of a wallet is protecting your private keys, because whoever controls the private keys controls the assets.
A public key is like a bank account number that you can share with others. A private key is like your password and must be kept secret. If a private key is lost or stolen, the assets connected to it are usually lost forever. Because of this risk, wallets include security features such as passwords, passkeys, biometric login, and two-factor authentication. Many wallets also warn users about scams, flag unusually large transactions, and help users avoid common mistakes.
For most people, crypto wallets are the easiest entry point into the world of blockchain. They are designed to give users access to powerful technology while hiding the complicated parts.
How wallets are categorized
There are two main ways to think about different types of crypto wallets. The first is who controls the keys, and the second is whether the wallet is connected to the internet. These two ideas are separate, but together they explain most wallet types.
Custodial vs non-custodial wallets
One way to classify wallets is by who holds the private keys. In a custodial wallet, a company or platform holds your private keys for you. This is similar to how a bank holds your money. Custodial wallets can feel safer and easier because the company handles security and recovery, but the trade-off is that you do not fully control your assets.
In a non-custodial wallet, you control your own private keys. No company or third party can access your funds without your permission. This gives you full ownership and control, but it also means you are fully responsible for keeping your keys safe. If you lose them, there is usually no way to recover your assets.
Hot wallets and cold wallets
Another way to classify wallets is by whether they are connected to the internet. Hot wallets are online wallets. They store private keys in software on a device that is connected to the internet, such as a mobile app or a web browser. Examples include Phantom, MetaMask, and Meridian. Hot wallets are popular because they are convenient and easy to use, especially for interacting with blockchain apps. The downside is that being online makes them more vulnerable to hacks or malicious websites.
Cold wallets, also called hardware wallets, store private keys offline. They usually look like a small USB device and must be physically connected to a computer or phone to approve transactions. Popular examples include Ledger and Trezor. Cold wallets are generally much more secure because the private keys are not exposed to the internet. However, they are harder to use, require buying a device, and are not always supported by every blockchain application.
Most wallets fit into one of four combinations. Some wallets are custodial and hot, such as centralized exchanges that hold your keys and stay online at all times. Many popular wallets are non-custodial and hot, giving users control of their keys while staying convenient for daily use. Hardware wallets are non-custodial and cold, offering the highest level of security but with less convenience. In rare cases, institutions may offer custodial cold storage for large amounts of assets.
Understanding these two dimensions, who controls the keys and whether the wallet is online, makes it much easier to understand any crypto wallet you encounter.
Summary
Crypto wallets are the main way people interact with blockchain networks. They secure and store private keys, simplify onchain actions, and protect users from common risks. Wallets balance ease of use and security, allowing people to benefit from blockchains without needing deep technical knowledge.
