Tech

Why are there different types of wallets?

The way cryptocurrency wallets interact with a blockchain is dependent on the method of how it stores information.

Most wallets during cryptocurrency’s infancy used a system known as a full node, which is designed to hold an entire copy of the blockchain to which its funds are attached.
While this was more viable during the technology’s infancy, blockchains are increasingly growing larger over time limiting the capabilities of storage space.

Full NodeFull NodeWhile nodes can validate transactions by confirming a new block’s addition to the blockchain, a full node is capable of performing the task of creating a block.

Today, many companies selling cryptocurrency wallets have evolved to use a newer alternative to full nodes, instead relying on SPV wallets SPV walletsEnsures transactions made from the wallet are in a block, providing confirmations that additional blocks are being added to the chain, or Simple Payment Verification wallets.

These wallets still have access to the full blockchain, but without having to store its entire contents. SPVs instead tap into other full nodes to source the information, working much more efficiently and functioning on much less computer memory.

While all cryptocurrency wallets interact with blockchains through either the full node or SPV systems, they can differ significantly in the way they store their contents. But they do market themselves on the two most important elements when users decide on which cryptocurrency wallet to use - security and convenience.

Cryptocurrency wallets generally fall into two categories of models – hardware and software.

Software wallets work digitally on a computer or online and are known as hot wallets, while hardware wallets are specifically designed-for-purpose USBs or printed physical copies of private keys and are known as cold wallets.

What are hot wallets?

Software wallets, or hot wallets, come in several forms and operate digitally. Online wallets utilise a storage cloud, offering the convenience of access from any connected device.
Using a cloud does however incorporate a third-party requiring users to relinquish their private keys and trust an online entity to keep them safe. The added process of accessing an online wallet also leaves gaps in secure connections and adds risk of theft and hacking.

However, online wallets remain popular because of the convenience they offer with making regular everyday purchases, and the better online wallets on the market offer higher rates of authentication security.

Mobile wallets also provide the convenience of all-areas access through an app, but often fall short of even the online alternative in their security measures. Mobile phones are portable tracking, listening and data storage devices and ripe for scammers and hackers to access and manipulate.

Users can often be their own worst enemies when it comes to phone security, particularly with their heavy reliance and everyday use. This puts mobile wallets at the greatest risk of being misplaced or damaged, and the permanent loss of cryptocurrency.

Desktop wallets can be downloaded and stored on a laptop and are usually a more secure way of storing larger amounts of cryptocurrency. This wallet functions without internet access and can only be utilised from that device.

However, if the computer a wallet is stored on has any sort of outside connection, it still runs the risk of being compromised by hacks.

Mobile WalletMobile WalletA form of an online wallet, or a hot wallet, also providing the convenience of all-areas access through an app.
Desktop walletsDesktop walletsPrograms usually located on a computer’s hard drive to store and manage cryptocurrency private keys.
All these hot wallets have a common reliance on an internet connection to function, allowing potential access to infiltrators. While hot wallets are the most common wallets on the market and the most popular among users, they are most prone to cryptocurrency theft.

What are cold wallets?

Cold wallets provide a less convenient but more secure alternative, because of their lack of reliance on an internet connection. Hardware wallets usually come in the form of a USB drive storing their information offline and offering higher levels of security and compatibility with a wider range of web interfaces and cryptocurrencies.

They are designed to be capable of performing their tasks on any type of public computer without compromising security thanks to an in-built seed function and its extra layer of authentication security.

Hardware wallets require carrying a small device in lieu of use making them less convenient than an online wallet.
But they provide higher levels of security and arguably a better balance with convenience.

They can also come in the form of paper wallets. Paper wallets provide arguably the highest level of security that comes with storing crypto key information offline.
They are literally a piece of paper, on which the details of a holder’s private keys are printed. Paper wallets require diligence from the user, as the loss of the physical wallet also means the loss of its connected funds. It is recommended to have multiple copies of paper wallets all safely stored in multiple secure locations.

Choosing the right wallet is dependent on how a user wants to use their cryptocurrency.

Long-term storage will usually require storing larger amounts of cryptocurrency, so cold storage will reduce the risk of hacks. Short-term storage for smaller amounts of cryptocurrency, or a wallet allowing for regular use may be best suited with a hot wallet.

Wallets: Tech

FAQ

What types of wallets are there?
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Cryptocurrency wallets generally fall into two categories of models – hardware and software. Software wallets work digitally on a computer or online and are known as hot wallets, while hardware wallets are specifically designed-for-purpose USBs or printed physical copies of private keys and are known as cold wallets.

Which cryptocurrency wallets are most secure?
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Paper wallets provide arguably the highest level of security that comes with storing crypto key information offline. They are literally a piece of paper, on which the details of a holder’s private keys are printed. Paper wallets require diligence from the user, as the loss of the physical wallet also means the loss of its connected funds.

Which cryptocurrency wallets are easiest to use?
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Software wallets, or hot wallets, come in several forms and operate digitally.
Online wallets utilise a storage cloud, offering the convenience of access from any connected device. However, using a cloud does however incorporate a third-party requiring users to relinquish their private keys and trust an online entity to keep them safe.

Which cryptocurrency wallet is best?
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Choosing the right wallet is dependent on how a user wants to use their cryptocurrency. Long-term storage will usually require storing larger amounts of cryptocurrency, so cold storage will reduce the risk of hacks. Short-term storage for smaller amounts of cryptocurrency, or a wallet allowing for regular use may be best suited with a hot wallet.

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