How Do Crypto Wallets Work?

Blockchain platforms have increasingly gained popularity over the last decade. This means a large portion of the global population has heard about cryptocurrency, but only a few can boast about the know-how of crypto-specific details. Blockchain technology encompasses a lot of components and one such is called a crypto wallet.

Let’s look at this topic in more detail and provide simple facts about what they are and how they function. Ultimately, this knowledge will serve anyone looking to create and operate a crypto wallet on a blockchain of their choice!

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Contents:

- Defining crypto wallets

- Classification of cryptocurrency wallets

- Hot

- Cold

- Custodial

- Non-custodial

- Paper

- How they function

- Final thoughts

Defining crypto wallets

Without getting overly technical, a cryptocurrency wallet can be defined as a digital app that plays the role of a virtual holder of your cryptocurrency. Unlike a physical one that stores cash, these wallets are created with the sole purpose of saving data that represents your virtual assets. Crypto wallets hold specific information that permits the holders to gain access to their crypto and make any trades whenever they wish to do so.

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Decentralized markets have gained a lot of mainstream fame and this has further piqued the interests of more individuals. This has led to an increase in active participants, and as of 2022, more than 84 million crypto wallets are active worldwide. In light of this popularity trend, the number of crypto wallets will most likely continue to rise.

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Crypto wallets make it easier for more people to interact with cryptocurrency. In the early days of Bitcoin, sending cryptocurrency was a complicated manual process. A practice that only someone who was well-seasoned could perform. In today’s blockchain markets, this task is taken care of by software. Leading to instant and efficient transactions.

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Classification of cryptocurrency wallets

Crypto wallets can be hot, cold, custodial, and non-custodial. We will look at what each of them is below:

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Hot

This type is quite popular among beginners. They are the least secure as most people prefer to use them for experimental reasons. In this case, they only have a few assets and aren't worried about losing what they have.

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Cold

Unlike traditional wallets, this is a physical device. It usually takes the form of a flash drive or hard drive and can have a physical screen and buttons. Because criminals require an internet connection to access your assets, this is the safest option (you'll be offline most of the time).

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Custodial

This type functions with the association of a third-party cryptocurrency exchange. It allows owners online access however, the exchanges have access to important information such as your identity. All contents can also be accessed by the exchange if necessary.

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Non-custodial

Cryptocurrency exchanges are not used in this case. Only you have access to the private key making this wallet harder to hack, especially in comparison to a custodial wallet.

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Paper

These are rarely used today. With these, users would write out their keys which alongside unique QR codes were scanned by specialized devices. The biggest drawback to this technology was that the sheets used were at a high risk of wear and tear.

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How they function

Crypto-wallets, accessible on mobile devices like smartphones or tablets, serve as software apps. You can use an internet connection and these devices retrieve crypto data fragments stored in a database. The wallet plays a crucial role in identifying and gathering fragments associated with your public address.

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Once collected, the data undergoes compilation and simplification before being displayed in your device. So when you try to access your cryptocurrency, the role of the wallet is to identify all these fragments that are associated with your public address.

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Thanks to these specialized applications trading crypto has become significantly easier. Using several modalities, you can sell and buy crypto from anyone on the blockchain, even if you focus on wallet mining for cryptocurrencies. The easiest way includes:

- Identify the recipient's address and enter it

- Using your unique security key to sign

- Enter the desired figure expected

- Approve and finalize

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As the recipient, your role will even be much simpler. In this case, you will only have to submit your user address. After you share your user address, things will move along more easily. The processes are usually straightforward but if you have any questions or need help, feel free to reach out.

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Final thoughts

Crypto wallets are a necessity when it comes to buying and selling crypto. Although this was possible before their inception, blockchain transactions were difficult to perform. Thanks to advancements in technology and the development of crypto wallet apps, anyone interested in crypto can perform complex transactions within a few clicks.

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Getting yourself acquainted with the technical aspects of the crypto wallet function will get you closer to appreciating how the blockchain cog moves. And we have looked at some of the important aspects to get you more aware of the nature of crypto wallets!