What is Blockchain Wallet and How does it Work?

In this Blockchain tutorial, we will learn about the concept of a Blockchain Wallet. And we will also discuss various features of Blockchain Wallet. Moreover, we will also illustrate the following topics.

  • Need of Blockchain Wallet
  • What is a Blockchain Wallet
  • Working of Blockchain Wallet
  • Blockchain Wallet Features
  • Blockchain Wallet Types
  • Security of a Blockchain Wallet

Need of Blockchain Wallet

With the introduction of Blockchain, cryptocurrencies like Bitcoin, Ethereum, altcoins are gaining popularity. And this is because of their countless advantages over traditional fiat currencies.

Now, due to this huge acceptance of cryptocurrencies, it requires the use of wallets to hold them. Similar to how fiat currency requires the use of wallets or banks.

But, when we look at traditional banking systems, they have several pitfalls that make it difficult to complete any transaction. For instance, the processing of transactions is frequently slow.

Furthermore, any transaction has to go through an intermediary, such as a bank, intending that there is a single point of failure.

Data can be damaged, altered, or even corrupted across diverse systems where accounts and balances are maintained.

Now, these issues are reduced or eliminated with the use of blockchain wallets.

What is a Blockchain Wallet

A blockchain wallet is used to store and manage different types of cryptocurrencies digitally. It also enables cryptocurrency transfers as well as the conversion of cryptocurrencies back to their native currency.

Now, transactions using blockchain wallets are safe as they are cryptographically signed.

Moreover, we can also access a blockchain wallet from any device over the internet including mobile phones. And it also maintains user identity and privacy.

What is Blockchain Wallet
Blockchain Wallet

Thus, a blockchain wallet holds all of the qualities required for safe and secure fund transfers and swaps between participants.

Now, using a blockchain wallet to make cryptocurrency payments is as simple as using any other digital payment method, such as PayPal one of the most popular payment system in the United States of America. Some best-known examples of Blockchain wallet includes Bitcoin paper wallet, Mycelium, and Electrum.

Read Introduction to Quorum Blockchain and Introduction to Polkadot Blockchain

Features of Blockchain Wallet

Now that we got a clear idea about a Blockchain Wallet. Next, let’s understand some of the key features of a good Blockchain Wallet. And these features are illustrated below.

  • User friendly: Making transactions with a blockchain wallet is now as straightforward as using any other digital payment system, such as PayPal.
  • Secure: Whenever a new blockchain wallet account is created, the wallet uses the public and private keys to secure the account.
  • Accessibility: An blockchain wallet is accessible from any geographical location. Moreover, we can easily access the wallet using any device over the internet.
  • Low fee: Compared to traditional banks, the cost of transferring funds is significantly lower.
  • Cryptocurrencies: A blockchain wallet allows the exchange between multiple cryptocurrencies. And this makes currency conversions simple.

Read What is Corda Blockchain

Working of Blockchain Wallet

Till now, we have understood what are Blockchain wallets and what basic functionalities that they offer. Now, it’s the perfect time to understand the working of a Blockchain or crypto wallet.

The whole working of a Blockchain wallet depends upon the pair of keys. These keys are referred to as public and private keys.

Now, when a blockchain wallet is created, a public and private key will be generated related to the concerned wallet.  

Working of Blockchain Wallet
Working of Blockchain Wallet

The private key is the most significant part of the whole working of a blockchain wallet.

Since this private key is required to access the wallet, it is important to not share or misplace it. By losing your private key, all the assets in the wallet will be lost.

The public key, also known as the blockchain wallet address, is another important component in the operation of a blockchain wallet.

Now, a user who wants to receive some crypto can share their public key with the sender.

And while making a transaction, the sender needs to specify their own private key and public key of the receiver.

Let’s understand the whole process using an example, and for this example, consider the usage of an email. So, if an email user wants to receive an email from someone then, that individual needs to share its email address.

So, the public key is similar to an email address. Whereas a private key is just like a password for your email account. But, the private key is used for transferring funds.

Every transaction involving blockchain wallets is fully encrypted, and the wallets of the individuals involved reflect the changes in their respective balances.

Read Introduction to Blockchain Mining

Types of Blockchain Wallet

After understanding the whole Blockchain Wallet process, it’s time to learn about the different types of Blockchain Wallets. The wallets can be incorporated into the following categories:

Hot & Cold Wallets

Based upon the connectivity to the internet, a wallet can be categorized as Hot or Cold wallet.

Hot wallets can be referred to as online blockchain wallet that allows rapid cryptocurrency transactions. Hot wallets, like regular wallets, are extremely user-friendly and appropriate for everyday transactions.

Whereas, Cold wallets can be referred to as digital offline wallets and they are similar to bank vaults.

Moreover, Cold wallets provide high-level security as compared to Hot wallets. The transaction signing process takes place offline with cold wallets, while the transaction completion information is sent online.

Types of Blockchain Wallets
Types of Blockchain Wallets

Read Tokenization in Blockchain

Software Wallets

A software wallet is similar to application software that is downloaded onto a device. Now, this device can be a desktop, smartphone, or web-based wallet that can be accessed online.

Software wallets such as Breadwallet, Jaxx, and Copay are some widely used examples. Desktop wallets, online wallets, and mobile wallets are some of the several types of software wallets.

1. Desktop Wallets

Desktop wallets are cold wallets that hold private keys on a desktop system (or server). Now, using this, we can disconnect the wallet from the Internet, conduct some offline transactions, and then reconnect the wallet to the Internet.

If the main server fails, a cold server, which is essentially your desktop, is used as a backup server. Some of the most famous desktop wallets are Electrum, Exodus, Bitcoin core.

2. Mobile Wallets

Mobile wallets are similar to desktop wallets, however, they are intended for smartphone users. They are quite convenient because they employ QR codes to do transactions.

These wallets are ideal for everyday use, however, they are prone to malware infection. Coinomi and Mycelium are the few best examples of mobile wallets.

3. Web Wallets

Web wallets or online wallets are different kinds of hot wallets. Moreover, these wallets can be accessed by users using almost any device. Now, a device can be a tablet or a desktop computer, or we can use your mobile browser to access it.

However, the private keys for web-based wallets are controlled by a third party and are stored online. Now, these types of wallets are great for small investments and transactions that need to be completed quickly.

Hardware Wallets

A hardware wallet is a variety of cold wallets. In this, a hardware device like a USB is used to store the private key of a user. These wallets feature portable devices that can be used to connect to a computer.

These wallets are less vulnerable to harmful attacks and are hack-proof. And to make a transaction from these wallets, one must first check that it is connected to your computer system. The most popular hardware wallets are Ledger, Trezor, and KeepKey.

Paper Wallets

A paper wallet is a technique of storing and managing cryptocurrencies that takes place offline. This wallet is a printed piece of paper with both your private and public keys on it. And both of the keys can be accessed using a QR code.

A paper wallet is used in combination with a software wallet to transfer funds. Using this, first, we need to deposit our assets in a software wallet. And then, transfer them to the public address printed on the paper wallet.

These wallets are often used for storing huge quantities of cryptocurrency since they are secure. Two popular paper wallets are Bitcoin Paper Wallet and MyEtherWallet.

Read Introduction to Enterprise Blockchain

Security of a Blockchain Wallet

The principle of using public and private keys for securing blockchain wallet transactions is quite basic.

However, it’s also crucial to consider the key aspects of security that a blockchain wallet can provide.

So, before deciding on a blockchain wallet, make sure it includes the following security features:

  • Password Protection: Similar to other digital services, Blockchain wallets also need some password or private key to protect user data. But, the Blockchain company, on the other hand, does not save user credentials. Now, the wallet’s password or private key is a crucial requirement for security.
  • Email Verification: Check to see if the wallet supports email verification for validating payments made through the blockchain wallet. This step can be found during the initial setup of the blockchain wallet.
  • Two-step Verification: Users should be able to access the wallet using two-step verification. Many Blockchain Wallet enables users to employ the use of two-factor authentication or even IP whitelists to protect loggins from unknown devices, reducing the risk of phishing.

Related Blockchain tutorials:

So, in this tutorial, we have discussed the concept of a Blockchain Wallet. And we have understood various features of Blockchain Wallet. Moreover, we have also illustrated the following topics.

  • Need of Blockchain Wallet
  • What is a Blockchain Wallet
  • Working of Blockchain Wallet
  • Blockchain Wallet Features
  • Blockchain Wallet Types
  • Security of a Blockchain Wallet