Crypto Wallet, is the most fundamental aspect of a blockchain environment. As per the common understanding, a crypto wallet is a program or device which allows users to store and transfer their tokens and digital assets. There are many types of wallets such as paper wallets, software wallets and hardware wallets. They are also further classified into hot/cold wallets and custodial and non-custodial wallets. How does a wallet work, and how to choose which wallet best fits your needs?
How does a wallet work?
In order to understand how a wallet works, it is important to understand the assets which are going to be stored in them. When it comes to crypto wallets, the assets stored in them are digital tokens such as cryptocurrencies and NFTs (Non-fungible tokens). These types of digital assets do not exist in physical form and are found in blockchain networks.
As such a Crypto wallet stores information such as public and private keys which are required to access a blockchain network. These keys are necessary to perform various activities such as making transactions, viewing and maintaining account balance and providing digital signatures which help authorise each transaction made on the blockchain network. These private keys which represent your wallets are essentially unique passwords which help safeguard and access your digital assets.
What are the types of wallets?
Wallets exist in two forms — Hot and Cold.
Cold wallets are essentially physical/hardware-based units commonly found in types of USB drives and paper wallets which store private keys but are most often found disconnected from the blockchain networks unless a transaction is made. To make use of this type of wallet, a user has to connect it to a device and copy and paste the private key in the relevant field before making transactions. This type of wallet is more secure it remains isolated from the network preventing theft of private keys. But it affects usability as a user requires the presence of a wallet device before making any transaction. They are more expensive and best suited to scenarios where assets are held over a longer period of time.
Hot wallet on the other hand is a software program that stores private keys and is found in devices such as computers and smartphones and is often connected to blockchain networks in real-time. Common examples include — desktop wallets, web wallets and mobile wallets. Given that it exists as a software program connected to the internet, there is a higher chance for vulnerabilities such as theft from hacking and cloning of keys unless a high degree of security is implemented in the computer/smartphone which houses the wallets. But it has higher scope for usability as it allows users to make transactions on the go given its ready-made availability at all times. It’s cheap and is often free, best suited to beginners and users to make frequent transactions such as trading, making online payments etc.,
Further Classification
Wallets can further be classified depending on their use case scenarios into Custodial and Non-Custodial wallets.
A custodial wallet is often web-based or exists in form of a hot wallet as it requires connectivity to blockchain networks in real-time. It is most commonly found in use case environments which involve trading and other similar real-time financial transactions. This comes with its own set of use case advantages but is often found to be less secure owing to the fact that users give up full or partial control over their assets to third parties. A user needs to trust the third party as they give control over their funds and assets and hence it involves a lengthy KYC and multi-factor authentication process. But it is vulnerable to online theft such as hacking or at times the custodian can turn out to be a scammer who absconds with users’ funds and assets. Most common examples of custodial wallets are centralised exchanges and lenders such as Coinbase and Celcius network.
A non-custodial wallet can exist in form of both cold and hot wallets. But this is more secure as the user has complete control and ownership over their assets and private keys. This makes users responsible for any actions involving their digital assets. The only disadvantage here is that a user could lose all access to their assets if they lose their private keys and don’t have a backup of the same. This doesn’t require any KYC or authentication process but has a limited scope of application in a real-world scenario.
Here at Kana Labs, we provide you with a non-custodial hot wallet-based platform which allows you to take the best advantage of your Solana and Neon assets. Our product suite consists of aggregated pricing on a wide range of DeFi services such as Swap, Stake, Lend and Borrow all from a single platform allowing you to gain the maximum advantage of your assets while retaining a high level of control and security to your assets.
