Understanding the Different Types of Crypto Wallets – The DeFi Series
The choice of which cryptocurrency wallet to use couldn’t be more important. You wouldn’t choose a physical wallet with a false bottom, and you should be at least generally aware of cryptocurrency wallet options so that you don’t choose a crypto wallet with potentially critical flaws.
It might be helpful to begin by defining what a crypto wallet is. A cryptocurrency wallet is the digital storage locker for cryptocurrency, though many serve additional functions. Non-physical cryptocurrency requires a digital wallet, as well as private keys denoting who the owner of the wallet (and the cryptocurrency within) is. Crypto wallets serve both of these functions.
In order to establish an operational crypto wallet, a person may have to:
- Choose a wallet provider
- Input certain personal information
- Link a funding and deposit source, such as a bank account
Once a user takes these steps, they may be able to purchase and sell cryptocurrency, buy goods and services using crypto, and engage with decentralized finance (DeFi) products like decentralized exchanges and lending services.
Choosing a crypto wallet requires more consideration than you might think.
There are two broad categories of crypto wallets: hot wallets and cold wallets. Hot wallets refer to those that are (generally always) internet-connected. Cold wallets are not directly connected to the internet, but may become so in order to complete transactions. Let’s dive further into the specific types of crypto wallets.
Crypto Wallet Type #1: Paper Wallet
Services such as the Dash paper wallet generator allow users to print their:
- Private keys, or the encrypted signature that makes a wallet specific to an individual
- Random public address, which Coinbase likens to an email address, as it allows other users to know where to send cryptocurrency to
A paper wallet may also contain a scannable QR code for easier transactions, including but not limited to payments and crypto trades.
Some of the benefits of a paper crypto wallet are:
- That a user can have physical possession of their public and private keys
- That a paper wallet is not immediately hackable
- That a paper wallet is disconnected to the internet, and is therefore not as vulnerable to energy- or internet-related problems as hot wallets are
Paper wallets may be as safe as the user that possesses them. While digital hacks may be averted with a paper wallet, it is vital that the owner of a paper wallet ensure its safekeeping, as losing it could have disastrous consequences.
Crypto Wallet Type #2: Desktop Wallet
Desktop wallets may generally rank behind paper wallets in terms of security (hacking-related security, at least), but ahead of online crypto wallet alternatives.
The ostensible difference between an online-only crypto wallet and a desktop wallet is the act of downloading the wallet itself. This act results in a user’s private keys being stored on their computer hard drive rather than on an online server. In some cases, this information could be stored both on a desktop and an online server.
Having a wallet saved on one’s desktop could come in handy if:
- An online wallet host is hacked
- An online wallet host crashes
For practicality purposes, desktop wallets are connected to the internet. They allow users to view real-time value changes of their tokens and, depending on the features of a specific wallet, may also allow them to complete transactions.
Though desktop crypto wallets offer a degree of separation from complete internet dependence (thanks to the downloading of keys and addresses), they are still directly tied to the internet. This always means that hacking is a possibility, but users may see a desktop wallet as a more secure alternative to a wallet hosted by a third party through the internet.
Crypto Wallet Type #3: Online Wallet
Online (or Web) crypto wallets may be the most immediately accessible and low-maintenance way to store and trade tokens. Casual crypto traders and investors may gravitate towards online wallets because:
- A third-party service may do all of the heavy lifting (providing the wallet, keys, and maintaining the server)
- An online wallet may have an easy-to-use interface
- An online wallet may be accessible from any device with an internet connection
- An online wallet may allow trading and crypto wallet services in one platform
Crypto Wallet Type #4: Hardware Wallet
Hardware wallets offer the physical, in-your-hand nature of paper wallets, but may offer additional features and significantly more pizzazz. Hardware wallets generally have common features including:
- A screen
- A handheld size
- Buttons or other means of operating the wallet
- The capacity to store a significant amounts and various types of cryptocurrency
- Computer connectability
Online wallets, put simply, may be the convenient option. History has shown that they are not the security-first option, however. Always connected to the internet, your online wallet could be the victim of hacking, and if the host becomes corrupted, then your wallet may be compromised just the same. You may also be taking a gamble that the hosts of the online wallet service are ethical.
Hardware wallets store users’ private keys. Unlike paper wallets, hardware wallets may have security features that prevent access to private keys in the case that the wallet falls into the wrong hands.
One pull factor for hardware wallets is their offline nature. This, like paper wallets, makes them less vulnerable to hacks, third-party malfeasance, and other threats that loom over internet-dependent wallets. Yet, owners of hardware crypto wallets may connect their device to the internet at any time to conduct transactions.
This gives hardware wallets a sort of hybrid nature that may prove appealing to security-conscious crypto traders.
Crypto Wallet Type #5: Mobile Wallet
Cell phones have become highly sophisticated and ever-present, and many buyers, sellers, and holders of cryptocurrency prefer mobile wallets. Many online wallets offer a mobile version, while some wallets are exclusively designed for mobile use.
Mobile wallets may warrant the same security-related concerns that any hot (internet-connected) wallet does. The funds in your mobile wallet may be only as secure as the host providing it. For that matter, it may be only as secure as your mobile device. Therefore, there is certainly an element of “buyer beware” to anyone who uses a mobile crypto wallet.
However, there are clear benefits of mobile wallets. They include:
- Extreme convenience
- All-in-one platforms that allow banking and trading
- Compatibility with both Android and iOS operating systems
- The ability to pay from a mobile wallet through QR-enabled scanning
In an increasingly mobile-dependent world, mobile crypto wallets offer clear benefits. You may weigh these pros and cons of different crypto wallet types when choosing the right wallet for yourself. Nomics provides a comprehensive rundown of cryptocurrency wallets in their many forms.