In blockchain terms, a wallet is a digital or physical storage space which stores the private key corresponding to a blockchain address. Bitcoin wallets and Ethereum wallets are two examples of blockchain wallets.
In order to understand what a blockchain wallet is, you first need to understand what a blockchain address is. A blockchain address is a unique identifier or “account” on a blockchain. It could be compared to a bank account, as it can hold a balance of coins (like bitcoin) or tokens (like security tokens). As with a bank account, you can transfer coins or tokens into or out of a blockchain address. But unlike a bank account, a blockchain address is not managed by people. All processes are fully automated.
Each blockchain address contains two essential items:
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Public key: Each blockchain address has a unique public key – also known as a public address. This alphanumeric code is needed by a sender looking to transfer cryptocurrency to the blockchain address. A good way to understand a public key is to compare it with the IBANs used by private accounts and savings accounts from banks. Anybody can use this code to transfer money into your bank account, but it cannot be used to access your account or make outgoing payments. The public keys of wallets appear next to each transaction listed on a blockchain’s public ledger. This means anybody can see the public key of a blockchain address alongside the exact number of tokens or coins transferred to or from that address using a blockchain explorer.
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Private key: Every blockchain address has a private key or private address. The private key gives its holder control over the blockchain address and any tokens or coins it may hold. A private key could be compared to online banking login information or an ID card which lets you view the contents of a bank account and order outgoing transfers. In the case of fully decentralized blockchains like bitcoin which are not controlled by companies or other entities, anyone who obtains a private key can use it to access the linked blockchain address. So holding a private key essentially makes you the owner of a blockchain address and its contents. For this reason, you should store private keys securely and never share them with unauthorized third parties.
Important: You cannot access a blockchain address without its unique private key. If you lose the private key, you lose access to the blockchain address and any coins or tokens it holds! You cannot request a new private key the way that you would request new login information from your bank.
Software wallets
A software wallet is a computer program or mobile app which securely stores a private key. A personal software wallet lets you view the contents of the linked blockchain address and transfer tokens or coins out of that address. For example, you can use a software wallet to make digital payments the same way you might with conventional mobile wallets like Apple Pay and Google Pay. Software wallets use secure authentication to prevent unauthorized entities from accessing a blockchain address and making transactions.
When you set up a software wallet, you need to enter a private key. The wallet then links to the blockchain address associated with that private key. The public key of the address is shown in the wallet. You can share the public key with third parties, which can use it to transfer tokens or coins into your blockchain address.
Hardware wallets
A hardware wallet is a physical, digital storage device which securely stores a private key. The private key is stored in digital form on the device itself. The advantage of a hardware wallet over a software wallet is that private keys are stored on a different device from the computer or phone which you use to get online. This makes them less vulnerable to malware and other malicious attempts by third parties to obtain your private key. Hardware wallets are most commonly used for storing private keys (along with the linked cryptocurrencies or tokens) offline. Generally, an additional software wallet and Internet access are required in order to make a digital transaction from the linked blockchain address to a different address.
Most hardware wallets use secure authentication and/or encryption to prevent unauthorized parties which get physical access to the device from obtaining the private key.
There are also hardware wallets which are designed to be used for offline transactions – much like physical banknotes or bearer securities. They include features which hide the private key from their holders, and indicate whether a private key has been compromised. You pass on the entire wallet with the private key (and therefore access to the linked blockchain address) rather than transferring coins or tokens from one address to another online. An Internet connection is only required if you need to confirm the contents of the blockchain address.
Paper wallets
A paper wallet is, as its name implies, a physical piece of paper or other material on which a private key is written or printed. A QR code or other image-based code substitute for the actual alphanumeric private key. A more resilient material like metal may be used instead of paper. The advantage of physical paper wallets over digital software and hardware wallets is that it is impossible for third parties to gain remote access to private keys. A third party would have to physically access the paper wallet (through burglary, for example) in order to obtain the private key.
Paper wallets are most commonly used for storing or backing up private keys offline. Paper wallets are also widely used by cryptocurrency ATMs and vendors. The buyer receives a piece of paper with a private key that gives them access to the automatically-generated blockchain address with the purchased cryptocurrency. Some paper wallets are designed to be used as cash or bearer securities. In this case the private key printed on the paper wallet is hidden, with security features in place that allow holders to identify whether it has been accessed.
Online wallets
An online or web-based wallet is a software wallet which is hosted on the Internet rather than on a phone or other device. You can only access an online wallet if you have an active Internet connection.
Online wallets are most commonly used in combination with blockchain services like cryptocurrency exchanges and savings accounts. They are often considered to be the least secure form of wallet because they are permanently vulnerable to online attacks and the service providers who maintain them are a prime target for cybercriminals.
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Popular cryptocurrencies explained
How to invest in bitcoin
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