Cryptocurrencies need no introduction anymore, thanks to their rising adoption. More and more people have started investing in cryptocurrencies, aiming to get the most out of their appreciating value while leveraging their volatility through trading. In this fast-growing industry segment, crypto wallets play a crucial role as they are a necessity to hold, manage and interact with the crypto assets.
There are many choices when it comes to these crypto wallets, each differing from the other in aspects like the security of crypto assets, key management, and user-friendliness. They have their share of advantages and shortcomings, which we will discuss in this article, especially for the benefit of newcomers to the crypto scene.
So, what are Crypto Wallets?
Let us revisit the basics. Unlike regular wallets where you store cash and cards, crypto wallets don’t really store any cryptocurrencies within themselves. Instead, they just store the public and private keys associated with the assets that are available on the blockchain. The public key will be associated with the respective private key and acts as an address on the blockchain that can receive crypto assets. It also denotes the address from which assets are sent to other wallets on the blockchain.
However, while sending funds the private key is essential to sign and authorize the transaction to any other address. So, in simple words, the private key is quite like a secure password to execute transactions.
As a store for cryptographic hashes that act as public and private keys, a crypto wallet can range from a piece of paper to physical drives to complex algorithmic programs that store and process information to complete transactions. Usually, the lesser the convenience of using a wallet the more secure it is. How and which of these wallets you use depends on the user’s convenience and the kind of security they are looking for.
Different Forms of Crypto Wallets
There are three main forms of crypto wallets. Hardware wallets, Software, and Paper Wallets.
A hardware wallet is a specialized, secure hardware device like a USB stick on which the private key is stored. These devices are known to be very secure because the keys are stored within a hardware security module (HSM) that always remains offline unless connected to an online device to make transactions. Apart from the keys being stored on a secure chip, users should have physical access to the device and have knowledge of the password that obscures the private key to make any transaction from a hardware wallet.
On a hardware wallet, users must navigate through multiple time-consuming steps to make transactions. This makes them impractical for those like crypto traders who conduct high-volume crypto transactions.
These are generally mobile, desktop, or web-based wallet applications storing private keys under layers of security features. In these wallets, the private keys stay online as long as the device on which it is installed is connected to the internet. There are mainly two types of software wallets, custodial and non-custodial. Custodial wallets are usually operated by third-party platforms that also possess the private keys for the wallet. Meanwhile, a non-custodial wallet allows users to maintain complete control over their wallet’s private keys, which makes them a lot more secure than their custodial counterparts.
Software wallets generally implement additional security features like 2FA and passcodes, yet they remain susceptible to hacking attempts, bug exploits, and malicious software attacks that could compromise the private keys.
A safe and low-tech alternative, paper crypto wallets are absolute cold wallets where the keys are maintained offline by printing them on a piece of paper. To access the fund users will have to enter the private key or scan the QR representing the private key on a software wallet application. While paper wallets are secure from online events, they are very vulnerable in the real world. It needs to be stored in a safe place and protected from the elements as the chance of them getting destroyed or stolen is much higher. Anyone who gets access to the paper wallet will gain access to all the funds stored in that address.
Picking the Right Wallet
Choosing the right crypto wallet depends on an individual’s requirement. A particular type of wallet may not meet all of your requirements, and there is no rule that prevents one from using different types of wallets to manage their assets.
While hardware wallets remain the safest bet, except for the multi-step transaction execution process, custodial software wallets with additional security features and good wallet handling practices come a close second. Hardware wallets have an upfront cost of acquisition and they perfectly suit the requirements of those whose primary priority is to safeguard their funds. However, those making frequent crypto transactions may find them cumbersome. They could find custodial software wallets a better fit. In both cases, the wallet user should take the necessary steps to back up their private keys or mnemonics and store them in a secure place.
Meanwhile, crypto traders would be more comfortable using non-custodial wallets offered by exchanges and trading platforms as they enable near-instantaneous transactions, but at the cost of private keys not being in control of the user. The best practice to use non-custodial wallets is to store just enough funds to meet the immediate transaction needs, while safekeeping the majority of the holdings in a custodial hardware or software wallet, or even a paper wallet as long as necessary precautions are taken.
A golden rule to be never forgotten while choosing a wallet is that the crypto wallets are safe only as long as the associated private keys are secured and remain private. The user will have complete control over their crypto funds only if they are in control of their wallet’s private keys.
Secure Your Crypto Assets with Liminal
Liminal provides a digital assets storage and security infrastructure solution for crypto-native businesses. Its tailormade products offer the highest safety standards to crypto assets as an alternative to conventional wallet solutions. With Liminal, users can efficiently manage their assets and wallet keys with additional measures to prevent losses due to theft or lost keys.
With an automated multisig wallet infrastructure, Liminal allows users to create verification and private key recovery mechanisms that ensure access to funds even if they end up losing their private keys. Apart from key recovery, Liminal also provides inheritance solutions for crypto owners, providing them with a way to bestow their loved ones with access to their assets in an event of their demise. In addition, the Liminal Smart Group wallets also make allowance for multiple people to operate a single wallet.
Want to try Liminal’s automated wallet infrastructure? Get started now