The world of Cryptocurrency is full of innovations and wallets; the programs that allow you to manage your Cryptocurrencies are no exception to the rule. There are so many different wallets on the market that it is tough to choose when you start as a user. Fortunately, it is possible to list the different types to help you find your way around.
In particular, you can separate all the wallets into two distinct categories: hot wallets and cold wallets. What differentiates them is that a hot wallet will be directly connected to the Internet when used, while a cold wallet will not. This property allows the cold wallet to offer maximum security by considerably reducing the hacker’s attack surface. This is why it is recommended to use a cold wallet to store large amounts of Cryptocurrency.
Before going into a little more detail about what hot wallets and cold wallets look like, let’s first examine what characterizes a wallet.
What is a wallet?
Generally speaking, a wallet is a device or program whose function is to manage Cryptocurrencies. It makes it possible to receive, send, and of course, to keep them. Therefore, the wallet is the interface that links the real world to crypto monetary protocols such as Bitcoin or Ethereum.
However, this rather widespread definition is not quite accurate and can be described a little better. From a technical point of view, a wallet stores the pieces of Cryptocurrency, or more precisely, the private keys that control these pieces. Wallets are, therefore, in reality, keyrings: they can be a sheet of paper on which the private keys are written, a computer file, or more generally, the software or device that manages these keys.
Thus, the main role of a wallet is to store a user’s private keys. In this way, an account on a centralized exchange platform is not a wallet per se: these platforms keep their users’ private keys for security and ease of use. Therefore, it would be more appropriate to speak of crypto-banks, although their applications are similar to wallets, which is the case with Coinbase or Uphold.
Hot wallets are private key storage solutions, i.e., solutions that use devices directly connected to the Internet. In particular, this will apply to all software wallets.
By being exposed to the Internet regularly, this type of wallet offers hackers a much larger attack surface than if private keys were generated and stored offline. This is why it is recommended to avoid storing large amounts with this type of solution and to limit oneself to small or medium amounts depending on the wallet used.
The hot wallets category includes different types of wallets: full nodes, lightweight wallets, browser extensions, and web wallets.
The full node, also called full client, is the first type of wallet that ever existed. As its name suggests, a complete node performs all the tasks necessary for the network to be healthy: it downloads the entire chain of blocks, validates and relays unconfirmed transactions, and checks the blocks’ validity. Because of its difficulty of use, this type of wallet is generally not used by ordinary people but by actors involved in the field such as miners, large merchants, web services, and advanced users wishing to have total control over their funds.
Bitcoin Core is probably the best known complete node software. It is the reference implementation of Bitcoin (BTC) used by more than 95% of the network nodes. It derives directly from the original client and, for this reason, is sometimes still referred to as a “Satoshi client“. But this dominance is not always the rule: Ethereum has many complete implementations, the most popular of which are Parity and Geth.
So-called “lightweight” wallets are nodes that do not download the blockchain and perform a simplified transaction check that requires few IT resources. They are often referred to as SPV wallets, where SPV stands for Simplified Payment Verification.
These wallets may be available on a computer, tablet, or mobile device, but their operation remains essentially the same from one device to another. On the computer, we find wallets such as Electrum for Bitcoin or the Exodus multi-asset wallet. For phones, we can mention BRD (formerly known as bread wallet), which also manages several Cryptocurrencies on cell phones.
These wallets can interact with the complete nodes of the Cryptocurrency’s peer-to-peer network (as BRD does) or with an infrastructure of dedicated servers that make the use more pleasant (as Electrum does). In both cases, this is done at the expense of user privacy, although some scrambling methods can be implemented (BIP-37, BIP-157/158). The security of your funds is normally not impacted.
Web browser extensions
A wallet can also take the form of a web browser extension, whether on Chrome, Firefox, or Brave. Unlike thin clients, these wallets do not always perform transaction verification: it depends on the extension. By being present directly in the browser, web extensions are beneficial for interacting with decentralized applications. The best known of them is undoubtedly Metamask, which runs on Ethereum. We can also mention Badger for Bitcoin Cash or Scatter for Eos.
The last category of hot wallets is web wallets. These are online interfaces to manage funds. Unlike exchange platforms, you keep control of your private keys when you use this type of service: they are managed by your browser and are never revealed to others.
Although security can vary from one site to another, this type of wallet suffers from a few vulnerabilities. Firstly, a web wallet does not generally verify transactions and is satisfied with the information provided by the servers of the site being used. Secondly, these wallets are sensitive to phishing on the web page used.
Among the many web wallets present on the Internet, one can find Blockchain.com or coin.space, which manages bitcoin, ether, and bitcoin cash. For Ethereum, there is also MyEtherWallet is a complete wallet allowing to manipulate all the tokens of the platform (ERC 20).
Cold wallets are solutions for cold storage of private keys, i.e., without any direct access to the Internet. This storage has the advantage of reducing the attack surface and, therefore, the risk of theft by hacking.
Cold storage is the ideal solution for securing cryptographic assets and is recommended for storing large amounts of cryptocurrency. Exchange platforms, which are prime targets for hackers, systematically use it to store their users’ funds.
Any device that remains offline at all times can be used as a cold wallet, but two kinds of wallets seem to have some popularity: hardware wallets and paper wallets.
Hardware wallets are devices whose specificity is to generate and store private keys in isolation and allow offline transactions to be signed. It is today the most secure solution for holding Cryptocurrencies.
In this category are the Ledger company’s wallets, including the Ledger Nano S and the Ledger Nano X. There are also other equally secure hardware wallets such as the Trezor, the Safe-T from Archos, or the KeepKey from Shapeshift.
Paper wallets are the simplest wallets imaginable: it consists of a private key and its corresponding address printed on a paper sheet. Note that the secret information can also be a mnemonic phrase. For a paper wallet to truly represent cold storage, it must have been generated by a machine that has no contact with the Internet, such as an old computer that is no longer in use.
Unlike hardware wallets, they do not allow you to sign a transaction and are therefore single-use. Nevertheless, they can be handy: to give cryptocurrency to someone who does not have a wallet, for example.
👉 How to create a paper wallet?
Each type of wallet has its utility. Knowing all of these categories will allow you to determine which one best suits each of your needs.
Since you are solely responsible for your crypto-actives, you should be careful and use multiple wallets if necessary.