What is a Blockchain Wallet? Types, Functions, Safety, Pros & Cons [2022]

With the rise in popularity of Cryptocurrency over the last decade, scores of investment enthusiasts are displaying enthusiasm to understand the technology and transaction process behind the virtual form of currency. Bitcoin is the first cryptocurrency ever created to decentralize world finance, which is based on Blockchain technology. Over time, many other cryptocurrencies have been introduced into circulation and take the investment world by storm. 

Just like physical currency, cryptocurrency also requires a wallet for storage purposes. This is where blockchain wallets come in. 

Blockchain Wallets

Crypto wallets are highly secure storage locations that allow users to store information related to crypto transactions and tokens. It is analogous to wallets that we carry to hold our printed money and monitors all transactions associated with a specific address. 

To be precise, a cryptocurrency wallet does not store any coin or token. Instead, it stores the private and public keys and the details of all transactions on that Blockchain. The user receives an ID, which is the address of the specific blockchain wallet. With this ID, users can receive, store, send, and manage their cryptocurrency assets on the Blockchain. One ID can store seven types of assets such as Ethereum, Bitcoin, Binance coin, Litecoin, etc. 

Blockchain wallet also refers to a specific wallet service available in the market, provided by the company’ Blockchain.’ 

Types of Wallets

Crypto wallets can be classified under the following different categories:

Classification 1:

  • Hardware wallets
  • Software wallets

Classification 2: 

  • Online wallets
  • Offline wallets

Classification 3: 

  • Deterministic wallets
  • Non-deterministic wallets

Let us try to learn about some of these in detail:

1. Deterministic Wallets

Wallets whose private keys are related to each other and can be backed up using 24 words long recovery mnemonic seeds are deterministic wallets. If one loses their private key, you can recover the wallet information by utilizing this seed which connects it to other private keys. The majority of modern wallets are deterministic.

It supports the BIP-32 format and enables hierarchical relationships with sub-wallets. 

2. Non-Deterministic Wallets

The type of wallets in which the private keys are not related are known as non-deterministic wallets. No mnemonic seed can recover all the private keys and the related data together.

3. Paper Wallets

Paper wallets are one of the most popular ones and are vastly used by investors. It is one of the safest methods of storing cryptocurrencies, especially for an extended time.

To create a paper wallet, the user can download and save the bitaddress.org webpage and follow the instructions stated while staying disconnected from the internet server. Unfortunately, all cryptocurrencies do not offer paper wallets. However, major cryptocurrencies like Bitcoin allow paper wallet options. 

4. Desktop Wallets

Desktop wallets are software and plugins which we can use across operating systems like Windows, Linux, Mac, etc. It includes web browser extensions that you can install on specific browsers. Although many users have complained about a weak firewall of the interfaces, it is still popular among investors globally. 

5. Mobile Wallets

Mobile wallets are apps installable on IOS and Android servers. These are easy to handle and have user-friendly interfaces. Example: Mycelium, Electrum, Coinomi. 

Some of the widely used desktop wallets are Jaxx chrome extension and Metamask ether wallet. 

Working of a Blockchain Wallet

It may seem complex initially, but the working of crypto wallets is very similar to transactions occurring in the real world. 

We can describe the entire process in just a few steps: 

  1. One party requests another for a certain amount of cryptocurrency. 
  2. The system generates a unique ID or address that can be sent to a third party to facilitate the transaction. This step uses QR codes for fast transfers.
  3. The third-party software is similar to the applications we use for digital payments like Paypal or Google Pay. Transactions happen similarly.

A new QR code is generated for every transaction, along with a new address to process a request. 

Traders can also exchange cryptocurrencies by a process known as swapping. For example, you can send Bitcoins and receive Ethereum of the same financial value, based on the effective exchange rate at that specific time. Generally, Swapping requires a longer time to process, unlike other crypto transactions. 

Presently users can swap only six tokens:

  • Bitcoin
  • Bitcoin cash
  • Ethereum
  • Tether
  • Stellar Lumens
  • USD digital
  • Wrapped DGLD

Wallet Fees

Cryptocurrency wallets charge dynamic fees. It means that there is no fixed fee for a particular transaction. It varies according to various factors like internet traffic, the volume of transactions, etc. Generally, these transactions are processed by cryptocurrency ‘miners’ for ‘farmers.’ The farming organization possesses the required hi-tech computers and technology to process large transactions. 

Just like shopping sites, blockchain wallets also provide priority options. By paying a certain priority fee, users can perform transactions way faster than regular users. 

High transaction fees and wallet charges are some of the primary obstacles bothering cryptocurrency investors in recent times.

Are cryptocurrency wallets safe?

A secure wallet is a must for crypto investors. A loosely guarded account can result in loss of assets and, ultimately, a substantial monetary loss. However, the wallets are secured by cryptography, and the company charges asserting fees for protecting the user’s data. The processes include:

1. Password protection

The private keys are the passwords used by investors to access their crypto wallets. The wallet company does not store this information. Therefore, once lost, this password cannot be retrieved. This is where mnemonic seeds come in handy.

2. Mnemonic seeds

Mnemonic seeds can be defined as a string of English words and alphabets in any random order, which users can use to retrieve a wallet account if the password is lost. These seeds also follow decentralization, which means that the wallet company cannot store users’ seeds. They can be used to recover wallets even if that respective company goes bankrupt and is out of the picture.

3. Optional security methods

Apart from the protection mentioned above procedures, users can secure their wallets against outside attacks like phishing. Two-factor authentication is used for blocking unknown IP addresses, thereby reducing the chances of getting hacked. 

Blockchain Wallet Review: Pros and Cons of Digital Cryptocurrency Wallets

1. Pros

  • Users can process transactions irrespective of the geographical distance between the receiver and sender.
  • Faster transactions in comparison to centralized systems of banks
  • Low transaction cost compared to legacy banking methods, banks charge a hefty processing fee when the volume of cash increases. 

2. Cons

  • Extremely low acceptance worldwide.
  • The volatility of the cryptocurrency market
  • Untraceable transactions: This characteristic feature acts both as a boon and a bane in the crypto world, but unfortunately, the latter applies in this case. If some mistake happens while sending tokens, you will most likely lose those coins forever. 

Conclusion

A decade ago, no one could have imagined the extent to which Blockchain technology would change the world of finance like this. What started as an experiment in 2009 has become a self-sustaining ecosystem in itself, with a market cap of over $2 trillion. Statistics show that the global blockchain market is estimated to grow at a CAGR rate of around 67.3% from 2020-2025. 

Wallets are an integral and irreplaceable part of the Blockchain circulation process, as every user needs a secure address to store their transaction details and protect their assets. However, many technical challenges are presently hovering around the concept of cryptocurrency wallets, as it is a relatively unexploited territory. This is why blockchain developers are currently in huge demand. As per reports, professionals with expertise in blockchain development earn a high salary of $140,000, with entry-level positions attracting up to $125,000 annually.

Evidently, if you are eyeing a career in this direction, you are on the right track. With a coveted Advanced Certificate Program in Blockchain Technology, aspiring blockchain developers can expect to be offered high-paying jobs. The 7.5-month course by upGrad and IIIT Bangalore is designed for working professionals looking to learn how to develop contracts and chaincode and create a blockchain from scratch. Apart from 200 hours of learning material, there are 1:1 rigorous training sessions, interview preparation, and career guidance classes. 

So, go ahead and apply for your seat today!

What are the basic features of a crypto wallet?

The key features based on which one can judge a crypto wallet are:

1. Security: An essential factor that separates one wallet from another is its security and troubleshooting capabilities. It is a matter of protecting your private key from hacking and phishing.
2. Ease of use: Maximum users operate on a user-friendly interface rather than a complex one, irrespective of other parameters like the speed of transaction or wallet charges.
3. Fast transactions: Speed of transactions is an essential factor. Some wallets take 6 hours to process a transaction, while others complete it within an hour.
4. Transaction fees: Lower transaction fees facilitate more frequent transactions and higher volumes.
5. Easy conversions: easy currency conversion helps to perform transactions across multiple cryptocurrencies. Few wallets allow swapping, as it is a time-consuming process.

Are blockchain wallets safe?

Blockchain provides a transparent interface for users with a three-layer security structure. It keeps regular contact with the users via email and alerts them whenever it senses any unusual activity or login. Blockchain wallet reviews are primarily positive and emphasize fast transactions at nominal charges.

Which are the best cryptocurrency wallets?

As soon as one starts investing in cryptocurrencies, they need a secure wallet backed by a trustworthy company. Some of the widely used wallets of 2021 are:

1. Exodus: It protects the massive variety of cryptocurrencies and has no purchase cost. It is the best one for beginners.
2. Mycelium: It provides customizable transaction fees and has appreciable security amongst similar free wallets.
3. Ledger Nano S: It is a hardware wallet providing cold storage.
4. Trezor Model T: This one has the best reviews among hardware wallets and has a built-in exchange facility.

Prepare for a Career of the Future

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