What Is a Blockchain Wallet, and How Do You Find The Best One?

How Blockchain Wallets Work

Blockchain wallets operate on the principles of blockchain technology, a decentralised and distributed ledger system. When a user creates a blockchain wallet, they are assigned a unique address on the blockchain. This address is used to send and receive cryptocurrencies.

• Receiving crypto assets: When a user requests funds, they share their blockchain wallet address with the sender. The sender digitally signs and broadcasts a transaction using their private key to the blockchain network. Once verified, the transaction is recorded on the blockchain, updating the recipient's blockchain wallet balance.
• Sending crypto assets: To send funds from a blockchain wallet, the user specifies the recipient's address amount and signs the transaction with their private key. The transaction is then broadcasted to the network, verified by miners, and added to the blockchain.

Many blockchain wallets also allow users to convert between different cryptocurrencies through exchanges or swapping services and gain access to stacking and other Web3 and DeFi activities.

Software (Hot) Wallets

Software wallets are digital wallets that can be installed and accessed from a desktop computer or mobile device. They are available as software applications or web-based interfaces. Software wallets include:

Desktop Wallets: These are programs that are installed on a computer or laptop. They give users full control over their private keys and are generally more secure than web wallets.

Examples: Exodus, Electrum, and Guarda.

Mobile Wallets: These are applications that can be installed on smartphones or tablets. They offer the convenience of accessing cryptocurrencies on the go. Mobile wallets are typically user-friendly and provide features such as QR code scanning for easy transactions.

Examples: Trust Wallet, Coinbase Wallet, ZenGo.

Browser Extensions: These are wallets accessed through a web browser. These solutions offer convenience but may be more susceptible to hacking attempts than hardware or desktop wallets.

Examples: MetaMask, Enkrypt, Bitget Wallet.

Offline (Cold) Wallets

Offline wallets, also known as cold wallets, store private keys and cryptocurrency data offline and are disconnected from the internet. This greatly enhances security, reducing the risk of online attacks or hacking attempts. Offline wallets can be hardware wallets or paper wallets:

Hardware Wallets: Hardware wallets are physical devices specifically designed to store digital assets securely. They are often in the form of USB-like devices, providing an extra layer of security as the private keys are stored offline. Hardware wallets are considered one of the most secure options for storing cryptocurrencies as they are immune to malware and hacking attempts.

Examples: Ledger, Trezor, and SafePal.

Paper Wallets: A paper wallet is a form of offline storage in which the public and private keys are printed on a physical piece of paper. They offer a high level of security as they are not susceptible to online attacks. However, they require careful handling and safeguarding to prevent loss or damage.

Besides those, there are also other categories of blockchain wallets:

Deterministic Wallets

Deterministic wallets, also known as HD wallets (hierarchical deterministic wallets), generate a sequence of private keys from a single seed or master key. 

This seed can restore the wallet and recover all associated private keys. Deterministic wallets offer the advantage of easy backup and recovery, as users only need to remember or store the seed phrase. Most modern wallets are deterministic.

Non-Deterministic Wallets

Non-deterministic wallets, also known as random wallets, generate private keys independently without relying on a seed or master key. Each private key is generated randomly and is not related to any other key. 

Non-deterministic wallets require users to back up each individual private key separately, making them less convenient for backup and recovery purposes compared to deterministic wallets.

Passwords

One crucial security measure for a blockchain wallet app is setting a strong, unique password. It should be hard to guess, not used elsewhere, and include a mix of characters. Remember, providers don't store passwords, so keep it safe. Store your funds in a secure place or consider a password manager to avoid losing access to them.

Recovery Phrases

Mnemonic seeds, also known as recovery phrases or seed phrases, are another critical security feature for blockchain wallets. A mnemonic seed is a series of randomly generated words that serve as a backup for your wallet. These words are typically provided to users when creating a new wallet account.

Mnemonic seeds allow users to recover their wallets and access their funds in case they lose their passwords or encounter other issues. It is essential to keep your mnemonic seed secure and confidential, as anyone with access to the seed can potentially gain control of your wallet. Consider storing your mnemonic seed in a safe place, away from prying eyes and potential threats.

Two-Factor Authentication

Enabling two-factor authentication (2FA) boosts your blockchain wallet's security by requiring an extra verification code for sign-ins and transactions. It adds a barrier for attackers, demanding both your password and access to your 2FA device. Most wallet providers offer 2FA for enhanced security.

IP Whitelist Feature

Some software wallet app providers offer IP whitelisting for added security. It lets users specify trusted IP addresses, limiting access to their wallets. This extra layer of protection helps prevent unauthorised access from suspicious IPs, enhancing security against hackers.

Multi-sig (Multi-Signature) Security

Multi-sig, or multi-signature, features enhanced security by needing multiple signatures for a transaction. Enabling it on your blockchain, the Bitcoin wallet adds extra protection, as multi-sig requires multiple keys from different sources.

Dynamic Fee Structure

Blockchain wallets often employ a dynamic fee structure for transactions.

During periods of high network congestion, fees may increase to incentivise miners to prioritise transactions. Conversely, during low network congestion, fees may be lower. Sometimes, wallets provide an estimated fee range or allow users to customise the fee based on their desired transaction speed and urgency.

It is important to note that blockchain wallet fees are separate from any fees charged by cryptocurrency exchanges or third-party services involved in the transaction. Be sure to consider all relevant fees when performing transactions to avoid any surprises.

Priority Fees vs. Regular Fees

Priority fees are higher fees that can expedite transaction processing, ensuring faster confirmation times. Regular fees, on the other hand, are lower but may result in slower transaction processing.

The choice between priority fees and regular fees depends on the user's urgency and willingness to pay a higher fee for faster confirmation. Priority fees are particularly useful when quick confirmation is necessary.

Factors Affecting Transaction Costs

Several factors can impact the transaction costs associated with using a blockchain wallet. These factors include:

• Transaction Size: In terms of data size, larger transactions may require higher fees to incentivise miners to include them in a block.
• Network Congestion: During high network congestion periods, such as popular token sales or significant market events, transaction fees may increase due to the high demand for block space.
• Wallet Provider Policies: Each wallet provider may have its own fee structure and policies.

Research and compare the fee structures of different wallet providers before choosing a wallet.

Advantages of Blockchain Wallets

• Decentralisation: These wallets enable users to have full control over their funds without the need for intermediaries such as banks. This promotes financial autonomy and reduces reliance on centralised institutions.
• Accessibility: Crypto wallets allow users to access their funds and perform transactions from anywhere with an internet connection. This provides convenience and flexibility, especially for users who frequently travel or live in areas with limited banking infrastructure.
• Lower Transaction Costs: Compared to traditional banking methods, crypto transactions often have lower fees, especially for cross-border transactions.
• Security: Blockchain employs robust cryptographic techniques to secure funds and protect user privacy. With proper security measures, such as strong passwords, 2FA, and secure storage of mnemonic seeds, digital asset wallets can provide a high level of security against unauthorised access.
• Diversification: Blockchain wallets allow users to hold and manage various assets within a single storage, facilitating portfolio diversification and enabling users to take advantage of the potential growth and opportunities the crypto industry offers.

Disadvantages of Blockchain Wallets

• Low Acceptance: Despite the growing popularity of cryptocurrencies, their acceptance as a form of payment is still limited compared to traditional fiat currencies. Not all merchants or service providers accept cryptocurrencies, which can restrict the usability of crypto wallets for everyday transactions.
• Volatility: Cryptocurrency markets are known for their volatility, with prices often experiencing significant fluctuations.
• Learning Curve: Blockchain technology and cryptocurrency concepts can be complex for newcomers. Using a crypto wallet requires a certain level of understanding of cryptographic principles, transaction processes, and security measures.

Keep Software and Firmware Updated

Regularly updating the software or firmware of your cryptocurrency wallet is crucial to maintaining its security and functionality. Wallet providers often release updates that address security vulnerabilities, introduce new blockchain wallet features, or improve performance. 

Check the wallet provider's website or official channels for any updates or announcements. Follow the instructions given by the wallet provider to update your wallet software or firmware.

Regularly Backup Wallet Data

It is recommended to regularly back up your wallet data and store it securely in multiple locations, such as encrypted external storage devices or offline backups. Test the backup process to ensure that the backup can be successfully restored if needed.

Protect Private Keys and Mnemonic Seeds

Avoid sharing your private keys with anyone, and be cautious of phishing attempts or fraudulent schemes that may trick you into revealing this sensitive information. Store them in a safe and inaccessible location, such as a physical safe or encrypted digital storage.

Double-Check Transaction Details

Before confirming any transaction, carefully review the details to ensure accuracy. Pay close attention to the recipient's wallet address, the amount to be sent, and any additional transaction notes or memos. Once a transaction is confirmed, it is generally irreversible, and recovering lost or mistakenly sent funds can be challenging.

Be Cautious of Phishing Attempts

Phishing attempts are a common method attackers use to gain unauthorised access to blockchain wallets. Be cautious of suspicious emails, messages, or websites that request your wallet login credentials, private keys, or mnemonic seeds. Always verify the authenticity of communication or websites before sharing any sensitive information.

Legitimate wallet providers will never ask you to share your private keys or recover phrases through unsolicited messages or emails. Be proactive in protecting your wallet from phishing attempts by regularly checking for secure connections (HTTPS), verifying website URLs, and enabling additional security measures such as 2FA.

Use Hardware Wallets for Large Holdings

If you have a substantial amount of cryptocurrencies, consider using a hardware wallet for added security. Hardware wallets store private keys offline and protect against online threats. They are designed to safeguard high-value assets and are considered one of the most secure options for storing tokens or coins.

Closing Thoughts

Recent market trends highlight the growing interest and adoption of blockchain technology and cryptocurrencies. At the same time, as Bitcoin's on-chain activity remains relatively low, it is clear that most holders are not eager to sell their holdings.

This could indicate strong confidence in crypto's long-term potential among investors despite the ongoing volatility. To take advantage of this upward trend, users need to understand the basics of blockchain technology, including the safe use of digital wallets to store and manage their cryptocurrency investments.