In this article, we’ll cover:

• How a crypto wallet works
• Crypto wallet types
• Security for crypto wallets

How does a crypto wallet work?

When you’re paying for things with traditional currency, you have lots of options: actual cash, a debit cart, or even a digital wallet that lets you use an app on your phone at the cash register. But crypto coins don’t usually have a physical existence, so how can you store and spend them? A safe, secure crypto wallet uses blockchain technology to make it possible.  

Crypto wallets allow you to interact with blockchain. They’re not directly akin to physical wallets, because you don’t technically put anything in them. Instead, they read the public ledger so you can see your balance and enable you to initiate and receive transactions, which are then stored on the ledger.   

Your public key provides the address other users need to find your wallet; you can find other people’s wallets with their public keys. Your private key is used to initiate transactions, also known as signing. Your private key proves that you own your crypto holdings, so it’s vital to keep it safe at all times. When used together, the public and private keys allow you to move and store crypto data securely and enable other users to view the balance held at any given time and make transactions with you.

You can use your crypto wallet to make transactions with whatever types of cryptocurrency you hold, including stablecoins and altcoins.  

Types of crypto wallets

Crypto wallets come in two varieties: hot and cold. A hot wallet is continually connected to the internet or to another device that has a direct online connection. That makes them convenient to use, but also means they’re more vulnerable to hacking attempts.

Cold wallets, on the other hand, are physical storage devices that are not connected to the internet. Your private key lives in your cold wallet; generally speaking, the only way for a hacker to get ahold of it would be to steal the physical wallet. 

Hot wallet types

A hot wallet is always connected to the internet and the blockchain network. They are easy to use, especially for making purchases with cryptocurrency. While convenient, hot wallets are more vulnerable to attack because both your public and private keys are stored online. Hot wallets come in a few different types: web, mobile, and desktop.

• Web wallets: Web wallets are website-based online wallets that generally require you to log in with a username and password. They’re convenient because you don’t need to install any software to access them; however, web wallets are only as secure as your web browser and server. Examples of web wallets include MyCryptoWallet, MetaMask, and MyEtherWallet.

• Mobile wallets: Mobile wallets are accessed via an app on your mobile phone. This type of wallet is convenient, as it can be used to make in-person payments to merchants who accept crypto. But mobile wallets are vulnerable to security risks. If you lose your phone or the app security is compromised, you could lose everything in your mobile wallet. Types of mobile wallets include Exodus, Coinomi, and Mycelium.
  
• Desktop wallets: Desktop wallets store and manage your public and private keys from your PC or laptop. These software wallets are considered more secure than web and mobile wallets, but less secure than any type of cold wallet. Because desktop wallets are on downloaded to your computer, they may be vulnerable to malware. Additionally, transactions may be slow depending on your network speed. Popular desktop wallets include Exodus, Atomic, and Electrum.

Cold wallet types 

Cold wallets are known for being extremely secure. Because they are completely offline, they’re incredibly hard for hackers to compromise. Cold wallets shouldn’t be able to communicate with any other electronic device unless it is physically plugged into that device when you’re accessing your keys. Any transaction initiated online is temporarily transferred to a storage device like a USB drive, CD, or hard drive. Then the transaction is digitally signed and transmitted back to the online network. You can get a hardware or paper cold wallet.

• Hardware wallets: Hardware wallets are specifically designed for crypto security. These physical devices connect to your computer via a USB port; they often look like a small hard drive. Your private key never leaves the hardware wallet, protecting it from hackers and malware. Additionally, the user must approve all transactions on the device itself, often by literally pushing a button. Hardware wallets include Trezor and KeepKey.

• Paper wallets: Paper wallets are exactly what they sound like: physical pieces of paper that have public and private keys written on them. The paper document usually has an embedded QR code that can be easily scanned and signed to authorize a transaction. Paper wallets are considered quite secure, as there is no way to connect them to the internet. That said, they can be easier to lose, so it’s important to store this kind of cold wallet in a safe place. 

Keeping your crypto wallet secure

Your cryptocurrency is only as secure as your wallet. It’s important to take extra precautions to protect your investment. Due to the nature of decentralized finance, once your crypto is gone, there’s currently no way to get it back. With that in mind, here are some tips to help keep your crypto wallet secure.

• Use a cold wallet. Because cold wallets are not connected to the internet, they’re a more secure way to store your data.
• Keep your private key private. Much like a PIN or the key to your safe deposit box, you must not share your private key with anyone.
• Avoid public wifi. Public networks are unprotected, making any transaction you initiate on them vulnerable to hackers.
• Use strong authentication. Enable two-factor authentication (2FA) for your crypto wallet; for additional security, use multi-factor authentication (MFA). 2FA goes the extra mile to prove you are who you say you are and that your crypto holdings are your own. MFA goes even further, adding one or more additional requirements to authenticate your identity. 
• Protect all your devices from malware. If you’re using crypto, you’ll be using an electronic device at some point, even if you’re using a cold storage wallet. Ensure that your computer, laptop, phone, and any other devices that connect to the internet are protected against malware to keep your crypto data secure.

Do you need a crypto wallet? 

Technically, you don’t have to set up a software wallet or put your coins in cold storage to buy and use cryptocurrency. Many crypto exchanges will let you store your cryptocurrency in a wallet within the exchange. Whether or not to use a crypto wallet, and the best kind for you, depends on the level of security you’re comfortable with and how much convenience you need. 

That said, there are benefits to having your own crypto wallet: it can be more secure, and you’ll have access to your data even if the exchange goes down. This can be especially important if you want to get involved in crypto as an investment strategy, such as buying coins for your investment portfolio or engaging in activities like crypto staking. 

The good news is, that you don’t have to decide on a crypto wallet right away. Many people who are new to the world of crypto opt to keep their coins on the exchange until they have a good handle on how public and private keys work so they can make an informed decision about the right type of crypto wallet for their needs.

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Many people associate blockchain with cryptocurrency, but they’re not the same thing. Blockchain technology is the foundation of digital currency, like Bitcoin, but it also has applications in many other recordkeeping systems, from health information to inventory management and beyond.

In this article, we’ll cover:

• The history of blockchain
• Features of blockchain technology
• How blockchain technology works
• Types of blockchain
• Benefits of blockchain
• Industries that use blockchain technology

The history of blockchain

The protocols underlying blockchain have been around since the 1980s, sparked by computer scientist David Chaum’s 1982 dissertation “Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups.” Other scientists built on Chaum’s principles over the next two decades, expanding on technologies involving cryptography, unalterable document timestamps, distributed computer systems, and systems for verifying digital records. 

But blockchain technology as we know it today came about in 2008, with “Bitcoin: A Peer-to-Peer Electronic Cash System,” a paper published under the pseudonym Satoshi Nakamoto; no one knows the actual person or people who wrote the paper. This was the beginning of Bitcoin, the first modern digital currency.

Bitcoin and Blockchain

The basic idea of Bitcoin is a currency unregulated by a central authority like a bank or government. Instead, it relies on blockchain technology to create a secure, distributed ledger of transactions, validated using a blockchain network. One year after Nakamoto’s paper was published, the first bitcoin was minted.

Features of blockchain technology

Blockchain technology relies on a peer-to-peer network of computers, all working together to run the blockchain’s algorithm in order to record and validate transactions, create blocks of data, and add them to the chain. Three key aspects of this technology are the ledger itself, the nodes in the blockchain network, and hashes that secure blocks. And when blockchain is used in cryptocurrency, there’s another crucial feature: each user’s digital wallet.  

Ledger

A blockchain’s ledger is the entire database of information: every block of data representing each transaction. This distributed ledger is the foundation of blockchain technology; traditional databases structure data into tables, while blockchain strings together data blocks. In doing so, it creates an irreversible timeline of data that cannot be altered. 

Node

Each blockchain network operates on a decentralized peer-to-peer network of computers; every computer in that network is a node. Each node downloads and stores the entire blockchain, and can also validate new transactions as they happen. In the world of cryptocurrency, the person running a node earns coins for validating transactions; investors can support this process by cryptostaking in order to earn passive income without operating a node themselves. 

Hash

A hash is a sort of cryptographic fingerprint that’s added to each block in the blockchain. Hashing is a mathematical function in which input of any length is run through an algorithm that produces a fixed-length output. That output is the hash, and it provides security because it cannot be reverse-engineered and the same data will always produce the same hashed value.

Digital wallet

A digital wallet is an application that stores an individual’s financial transactions. In the world of cryptocurrency, you need one to store your coins and make transactions, like making purchases or transferring coins to people. When you make a transaction, it’s verified by a node and added to the ledger; your digital wallet is then updated to reflect your transaction.

How blockchain technology works step-by-step

Let’s look at how blockchain works in practice by using the example of a Bitcoin transaction:

1. First, you request a transaction. For this example, say you want to send bitcoins to another user, so you log in to your digital wallet and enter the user’s digital wallet address to send the coins 
2. The transaction request is broadcast to the nodes in the blockchain network
3. The nodes compete to be the fastest to verify the transaction using the Bitcoin Core, which is the software used by Bitcoin’s blockchain. The fastest node verifies the transaction and earns bitcoins for doing so
4. Your transaction is gathered up with several other transactions and put into a block with a hash; this is done by a node that functions as a miner in the blockchain
5. This new block containing your transaction is added to Bitcoin’s distributed ledger
6. The transaction is complete, so the coins you sent are deducted from your digital wallet and added to the other user’s wallet 

Types of blockchain

As blockchain technology has evolved, four primary types have emerged. The original blockchain that powers Bitcoin is permissionless, meaning anyone can be part of the network; permissionless public blockchains are the basis of most other forms of cryptocurrency. There are also permissioned blockchains, which only allow certain users to join the blockchain network. 

Public blockchain

Also known as permissionless blockchain, a public blockchain is open to anyone who wants to join the network. Many popular cryptocurrencies rely on this type of blockchain, including Bitcoin and Ether. Proponents of decentralized finance praise public blockchains because they’re transparent, immutable, and open to anyone with a computer and internet access. That said, there are drawbacks: the size of the network can slow processing time for validation, and their anonymous nature can make them attractive to criminals who want to perpetrate fraud or sell illegal commodities.

Private blockchain

A private blockchain is just that: private to a select group of users. These permissioned blockchains are managed by a centralized system, and users must obtain permission from a network administrator to join. Private blockchains are often used by individual organizations that want to leverage the benefits of the technology while also maintaining strict compliance protocols. Private blockchains tend to offer more speed, scalability, and stability than public ones. 

Consortium blockchain

Consortion blockchains, also called Federated blockchains, are a bit like private blockchains, but they’re managed by multiple organizations instead of just one, making them semi-decentralized. They require permission to join, are considered highly secure, and have relatively few nodes. This type of blockchain technology is commonly used by a group of companies in the same industry, such as insurance and healthcare, in order to more efficiently exchange information and process transactions. The downside is that a network structure governed by multiple entities can slow down development and create logistical obstacles if all parties can’t come to an agreement on protocols and processes.   

Hybrid blockchain

A hybrid blockchain is like a blend of public and private blockchains, attempting to leverage the best of both worlds. While they can be structured in different ways, in most cases the ledger is accessible and transparent to everyone, just like a public blockchain, while modifications made to the ledger are controlled by a central organization, as they are in a private blockchain. This approach is used in many industries; for example, the IBM food trust uses a hybrid blockchain to improve efficiency in the food supply chain. 

The benefits of blockchain

Blockchain enthusiasts cite many advantages of this technology, both for cryptocurrency and beyond. It’s intended to solve many of the issues that have long been associated with digital record-keeping, such as security, transparency, data integrity, and efficiency.  

• Security: Every transaction is recorded, verified by a node, hashed with a unique identifier, and added to the blockchain. This makes it very difficult for hackers to tamper with data; any attempt to edit information in one block would require a hacker to edit every single block in the chain, all while publicly visible to the thousands of nodes in the blockchain. And hashing ensures that if a transaction is altered later, the tampering is evident.  

• Immutability: Once a transaction is verified, it cannot be erased from the ledger. That permanence increases security and the reliability of the record-keeping.  

• Transparency: With a public blockchain, the ledger is visible to anyone who wishes to view it. Records can be reviewed for security and accuracy at any time, by any party, reducing the potential for fraud to go undetected.
  
• Privacy: While the ledger is viewable by everyone, personal information about individuals is not. Each user has a unique code called a public key; when they make a transaction, that’s the only identifiable info recorded in the ledger.
  
• Efficiency: The decentralized nature of blockchain technology enables rapid processing of transactions, with thousands of nodes operating 24/7. For example, if you were to deposit a check into your traditional bank account on Friday night, you might not see the funds in your account until the following week. If someone sent bitcoins to your digital wallet, on the other hand, they’d likely be verified and secure in a couple hours or less. 

• Reduced costs: Management by a central authority usually comes at a price, such as fees for processing credit card transactions or making purchases in foreign currency. With blockchain, there’s no third-party verification costs. When using cryptocurrency, transaction fees are often minimal. 

• Banking accessibility: A central tenant of most cryptocurrencies is making it possible for anyone with an internet connection to store and use money without a central authority gatekeeping who can access financial tools. Blockchain enables systems in which the “unbanked” can do just that, which has an especially notable impact in developing countries, where access to banking can be limited and security concerns about cash abound. There are over 18,000 types of cryptocurrency available, including stablecoins, whose value is pegged to a fiat currency like the US dollar.

Other industries that use blockchain technology

If you’re asking “What is blockchain?” you may be one of the many people who first heard of this technology in the context of Bitcoin and other cryptocurrencies. While enabling the rise of various types of digital currency, blockchain technology has an incredibly wide variety of applications. 

One reason blockchain can be useful in so many industries is that it enables smart contracts. These digital contracts are recorded securely on the blockchain and automatically executed when certain terms and conditions are met. Automation makes it possible for all parties to instantly know the outcome without the time and cost of third-party validation.  

Finance services

Blockchain has applications for traditional financial services as well as cryptocurrency, including asset management, payment processing, insurance, banking, and lending. One example is mortgage lending: blockchain can make a process that usually takes up to two months faster and less risky. Lenders can quickly and accurately verify financial documents, predict and collect credit score information, automate processes like underwriting, and manage transactions throughout the life of the loan. Liquid Mortgage, for example, is one platform using blockchain to support every part of the mortgage lifecycle.  

Healthcare 

A tremendous amount of data must be securely recorded, stored, and shared in the healthcare industry, and privacy is paramount. There’s a vast number of entities involved in the data, including healthcare providers, hospitals, insurance companies, and pharmaceutical companies. All that complexity can be streamlined with blockchain. Enterprise Ethereum is one blockchain being used in the healthcare industry to keep protected health information private when managing medical records, enable better traceability in the pharmaceutical supply chain, minimize fraud in clinical trials, and more. 

Media and Entertainment

One of the central concerns of the media industry is protecting against copyright infringement, which has grown increasingly challenging in the digital age. The music industry encountered its first major headache with the launch of the music-sharing software Napster in 1999, and the difficulties have only compounded as file sharing and streaming services have blossomed. With a centralized blockchain ledger, identifying and shutting down infringement is far more effective. There’s an upside for artists, too: blockchain can remove intermediaries that eat into their royalties and make it easier for them to get paid for their content thanks to smart contracts. 

Retail fashion industry

The complexity of the supply chain creates a tremendous amount of data management issues in the fashion industry. Blockchain can make it easier for producers and consumers to track the origin and journey of every component of their products. This allows people to understand the sustainability impact of goods and authenticate luxury items with tokens to guard against counterfeiting. Businesses can also reduce the operational costs associated with tracking production and inventory.   

The promise of blockchain technology

The answer to “What is blockchain?” is deceptively simple: a decentralized digital ledger of transactions. But what the technology enables is vast and complex. While it all started with Bitcoin, and is most often associated with digital currency, the possible applications of blockchain technology are changing the landscape of many industries. 

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