What are the different types of wallets?

The Dangers of Holding Crypto On An Centralized Exchange

To understand the importance of crypto wallets, it can be helpful to first understand the dangers of holding crypto on a centralized exchange. When you keep your funds on an exchange, they are not stored in the blockchain and are instead held by a third party. This means that your assets could be at risk, if the exchange is hacked or experiences a security breach.

As the saying goes, "not your keys, not your crypto." This means that if you don't own the private keys to access the funds on an exchange, then it is not yours. That's why it's important to consider other options for storing your cryptocurrency.

It may be more convenient to just leave them on the exchange immediately after buying them, but technically, you won't own the crypto until it's in your own private wallet. Crypto held on an exchange is more like a claim ticket than actual crypto ownership.

If a centralized exchange goes bankrupt, you may never see your funds again. This is because they are not FDIC-insured. To make sure your crypto remains safe and secure, it’s important to use a personal wallet. Personal wallets enable you to freely move your money around without withdrawal wait times. This freedom is another benefit of personal wallets.

The Benefits of a Seed Phrase (Private Key)

A seed phrase is a set of random words that are used to generate a private key. This private key is used to access your cryptocurrency in the blockchain. Seed phrases are considered one of the most secure ways of storing crypto because only you know what the phrase is and no one else can access it without knowing it.

A seed phrase wallet is one of the most secure ways to store cryptocurrencies. It uses a 12-24 word mnemonic passphrase to generate a unique key for each user, allowing them to access their funds without any third-party involvement. The main benefit of this type of wallet is that it allows users to remain in control of their private keys and funds, which makes them almost impossible to hack or steal.

It's essential to keep your seed phrases to yourself because if someone else finds out, they could gain access to your funds. That's why it's important to store the seed phrase in a secure and safe place. Forgetting your seed phrase could also mean losing access to your funds forever.

This type of wallet is created by recording or memorizing a set of words (called a "seed") that can be used to generate a secret key and address associated with your cryptocurrency funds. With this kind of wallet, you are in control since you hold onto the seed phrase instead of relying on someone else, like a custodial service or exchange to store it.

What Is The Public Key?

The public key is a cryptographic code that allows you to receive cryptocurrencies. It's generated from the private key and can be shared with others so they can send you cryptocurrency funds.

A wallet address is a unique string of letters and numbers that represent your public key. Anyone who knows your wallet address can send you cryptocurrency funds, but only the person who holds the private key can access the funds. The public key is often represented as a QR code, which makes it easy to scan and send cryptocurrency without having to type in an address.

Multisig Wallets

Multi-signature wallets can come in handy because you can share the seed phrase with someone else and they'd also need to approve transactions before they are executed. These wallets are used to add an extra layer of security and help prevent accidental losses.

For example, a wallet could require 2 out of 3 signatures before executing a transaction. This increases the level of security and is often used for large sums of crypto or for a group fund such as a family fund or business fund. Multisig wallets are a great choice if you want to share access with someone else, but still want to maintain control of the funds in case something goes wrong. 

Cryptex has a treasury wallet that can only be accessed through a governance vote and executed by the multisig. Linen wallet is also a multisig wallet. 

Cold Wallets (Hardware Wallets)

Cold storage wallets are a type of wallet that is not connected to the internet, making it an extremely secure way of storing crypto. These wallets can be physical devices (like a USB drive) or paper documents with your private keys printed on them.

The main advantage of a cold wallet is that it prevents hackers from accessing your funds since the wallet isn't connected to the internet. It also gives you full control over your private keys and prevents the exchange from having access to them. For example, Ledger and Trezor are two popular cold wallets as they are not connected to the internet and enables users to hold their own private keys offline.

Hot Wallets (Online Wallets)

Online wallets are connected to the internet. These wallets can be hosted by a custodian service or an exchange, but the user typically has full control over the private keys and funds. The main benefit of this type of wallet is its convenience — you can access your funds from anywhere as long as you have an internet connection.

Browser-based wallets are a type of hot wallet, which allows you to access decentralized applications (dApps) directly from the web. This makes it easier and faster for users to interact with these dApps without having to install any extra software. OKX wallet, Coinbase Wallet and Metamask are examples of popular hot wallets.

Final Thoughts

Overall, it’s important to keep in mind that there are different types of wallets available for storing crypto. Each has its own benefits and drawbacks, so choose the one that best suits your needs.

Although a centralized exchange is an easy option, it puts your crypto at risk since the exchange has complete control over it. Personal wallets, on the other hand, are more secure since you maintain full control of your funds and private keys.

Seed phrase wallets are considered one of the most secure options for storing crypto because only you know what the phrase is and no one else can access it without knowing it. Just make sure you know the difference between your private keys and your public keys. By doing so, you will have complete control of your crypto transactions.

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