Helping you secure your crypto assets, one step at a time- read on to learn more about crypto wallets, the different types, how they function, and so much more!
A wallet is a software application that enables you to store your cryptocurrency and carry out transactions.
How does a crypto wallet work?
A crypto wallet consists of 2 keys- the public key and the private key. While a public key is a set of characters which represent your wallet, a private key is a security code that allows you to make transactions and validate ownership of your holdings.
Crypto wallets don’t actually store cryptocurrency. Wallets only enable transactions with the help of public and private keys.
So how exactly do crypto wallets aid in carrying out transactions?
The usual process is to enter the wallet address of the receiver, select an amount to transfer, sign the transaction using your private key, add money to cover the transaction fee and send it.
Receiving cryptocurrency is even simpler. The sender simply enters your address and follows the same steps. The transaction is complete after you accept the payment.
Guard your private key with your life- you lose it, you lose access to your funds!
Types of wallets
Crypto wallets can be broadly classified as hot wallets and cold wallets, based on how they are stored.
A hot wallet is a digital wallet that can be accessed online and that enables cryptocurrency exchanges between its owner and end users.
In simpler words, it’s a wallet that is always connected to the internet and hence is always accessible online.
A cold wallet is a physical device that stores your cryptocurrency offline. Cold wallets are by no means connected to the internet, and thereby enhance the security of your crypto wallet as well!
You’re wondering what a cold wallet looks like, aren't you? It looks similar to a pen drive, and is super handy! 💾
An alternative solution- Smart Contract Wallet
Wait, what? 🤔
A smart contract wallet is a crypto wallet managed by a smart contract instead of a private key. In simpler words, any wallet that is connected to a smart contract is a smart contract wallet.
Single-sig (or single-signature) wallets are basically crypto wallets that just need one signature to verify a transaction.
For example, Kara wants to send 2 SOL to Nate. Then, only Kara’s signature will be needed to proceed with the transaction.
Multi-sig wallets are digital wallets that use multiple signatures to authorize a transaction. This implies that not just one, but multiple private keys are required to sign and verify a crypto transaction.
Let’s give you an example to illustrate how multi-sig wallets work.
Jacob, Betty, and Vanessa run a company XYZ. Together, they create a wallet for XYZ and use that wallet to regulate transactions. Since it is a smart contract wallet, they have already agreed upon the basic terms of the contract.
According to the terms of the contract, the wallet that they created will require a minimum of two signatures to verify a transaction. Thus, only when two of the total three signatures are given, the transaction gets verified.
Make a note: The parties involved in the contract get to decide the threshold. Ideally, the terms of the contract could also necessitate the need for all 3 signatures, instead of just two. It’s completely up to the discretion of the parties! 😌
Now that we’ve understood the different types of wallets, let’s help you set up your very own wallet! 🥳
How to set up a Hot Wallet
For illustrative purposes, we’ll be using Phantom as an example of a hot wallet.
- Install the Phantom app on your device, or download the extension on your browser.
- If you’re a brand new user, click on ‘create a new wallet’.
- You will then be required to create a password (make sure it’s a strong one! 🔐) and agree to the terms of service.
- The page will then display your Secret Recovery Phrase. (Remember, this is the only way you can recover your wallet, and hence do not share it with anyone! 💪🏼)
- Click on ‘Continue’ and you’re all done!
If you already have a wallet, and you’re curious to know how to make transactions, look no further. We’ve got you covered! 🚀
Let’s say you wanted to send 0.2 SOL to your friend, Hannah.
- Click on ‘send’.
- Select the token you wish to transfer to her. We’ve chosen Solana (SOL).
- Enter your friend’s public key, which also acts as her public address.
- Enter the amount you wish to transfer to her.
- Click on ‘send’ and you’re done!
Tips for using a Hot Wallet
Due to their internet connectivity, hot wallets are susceptible to being attacked by hackers and other malicious individuals looking to steal your funds or personal data.
Even though the vast majority of today's hot wallets have numerous security features, it is always recommended that wallet owners take the necessary precautions.
- Never share your seed phrase with anyone, or store it online. We would advise you to write it down on a piece of paper, and store it safely in your vault.
- For security reasons, avoid transactions using public wi-fi.
- Make sure that you download hot wallets only from their official websites. Many fraudulent websites try and imitate official websites, so please be careful!
- Do not ever isolate your system/device when using a hot wallet. Anyone can easily get access to your account if left unauthorized.
How to set up a Cold Wallet
For illustrative purposes, we will be giving you an example of setting up a Ledger account!
Let’s give you a step-by-step guide to help set up your first wallet!
Before you start, make sure to download Ledger Live on your computer. Then, make sure to update your Ledger firmware.
If you’re all set, let’s get into it!
- Turn on your cold wallet and stick to the directions displayed on the screen.
- To access the wallet, you must generate a PIN.
- The 24-word seed phrase should be written down and kept in a secure location.
- To access multiple cryptocurrencies, NFTs, or other digital assets, you might need to install apps on your cold wallet.
How to connect a cold wallet to a hot wallet?
Connecting a cold wallet to your hot wallet is simpler than it sounds. This is done to enable your cold wallet to function smoothly.
- Download Metamask as an extension on your web browser.
- Once you’ve done that, your homepage should ideally look like this.
- Now, click on the profile tab, and select ‘connect hardware wallet’.
- You will now have the option to choose from different cold wallets.
- Finally, plug in your cold wallet and click on ‘Continue’.
- You’re all good to go! ✅
It’s that simple.
Tips for using a cold wallet
- Make a backup of your data, no matter how it is stored. Users should create numerous copies in case one is misplaced, destroyed, or otherwise unavailable.
- We’d advise you to use online security software. Whether or not your device is online, this will aid in preventing malware from accessing your cryptocurrency.
- Finally, keep your systems, applications, and devices updated at all times. Updates routinely resolve software bugs, which hackers will attempt to exploit.
How to transfer crypto to your wallet?
Getting down to business! Here’s how you transfer crypto to your wallet.
- Once you’ve done that, click on the ‘Send/Receive’ option in the top right corner of the screen.
- You’ll be offered a list of cryptocurrencies to choose from. Click on Solana.
- Now, go over to your Phantom wallet and click on your wallet address.
- Copy and paste this address onto Coinbase, and enter the amount that you would like to transfer.
- Click on ‘Continue’.
- Hold your breath, and your transfer should have been completed within a few minutes! 🎊
Nearly done! 😅
The very characteristics that define cryptocurrencies-ownership anonymity, absence of banking institutions, and minimal regulation-all have significant security consequences. It's indisputable that investing in cryptocurrency involves cautious thought and planning because you are wholly accountable for your safety. Before investing, learning about security and how to secure your cryptocurrency should be at the top of your priority list! ⚠️
With this, let’s move on to our next article: Is my wallet 100% secure?