Protecting your digital assets might be overwhelming or too difficult for some people, mostly because there’s tons of ways to store them. Many people have lost access to their wallets because of not protecting their private keys properly or not even owning them at all. Today I want to break down in a simple way the different types of wallets you can use to store your coins/tokens and their pros and cons so you can decide which one fits your needs better.
So why is choosing a wallet important? Aren’t all safe?
You are the owner of your digital assets, and that’s why you have to make sure they are secured and easily accessible. Technically speaking, all wallets are secure, but they have their own flaws that you have to be aware of before deciding to choose a certain wallet. Without being aware of the issues each method has, you can’t be prepared to troubleshoot a problematic situation so is really important to understand the basics.
Types of wallets
Hardware wallets are devices that can store your digital assets on a peripheral device, usually a USB. This device generates the wallet keys and sign transactions. The cool thing about them, and why are they the preferred method to store your assets, is that they hold the private keys internally so they sign the transactions also internally to only transmit the result of the transaction to the computer or online device they’re connected to. This separates the crucial data from the online environment that is susceptible to hacking, malware or other harmful attacks. A hardware wallet usually has an extra layer of protection like a pin code and advance passphrases.
- Stores your private keys offline away from hackers
- Immune to any type of malware
- Added security layer
- Supports multiple cryptocurrencies in one device
- Easy to use
- You need to purchase one. (They can be considered expensive but in return of protecting hundreds, thousands, even millions of dollars worth of value, it really doesn’t matter)
- It’s a physical device so if you lose it or it breaks, without a backup, it’s done.
A multisignature wallet avoids the single point of failure problem by requiring multiple private keys to sign a transaction. These keys can be spread across multiple devices or locations to reduce the risk of hackers or malware infecting all of them. They usually have 3 signatures, and request 2 out of 3 to be used to sign a transaction. If you lose one, you don’t lose your money because you can restore them from a paper backup.
- Extra security layer
- Malware and hacker resistant (unless all the devices are infected)
- Good for businesses
- Not for beginners
- https://github.com/gnosis/MultiSigWallet (For Ethereum and ERC-20 Tokens)
Cold Storage Wallets
A cold storage wallet is pretty much the same as a hardware wallet, the private keys are stored offline, payments are done online and signing them is done offline. The difference with cold storage is that is done using a general purpose device instead of a specialised peripheral device like hardware wallets.
- Extra security
- Wallet interactions are done offline
- Malware and Hacker Resistant
- Not portable like hardware wallets
- You’ll need to get it online eventually to transact.
Cold Storage Wallets
- USB or Hard drive with no access to the internet
- Hardware wallet
They are wallets that are kept online and rely in a single signature. Qt wallets are an example of hot wallets. They are downloaded and they need to be kept online to be updated with the blockchain to be able to interact with it.Exchanges usually use hot wallets unless they have everything in cold storage and their wallets only go online for withdrawals. Online web wallets are hot wallets. When you don’t own your private keys, like the case of exchanges or some web wallets, it’s called a custodial wallet, which is kinda similar to a bank, defeating the purpose of ownership that blockchain provides but still, people choose them for the convenience. There can be a mobile, desktop or online version.
- Easy to use
- Immediate access to your funds
- Multiple backup options
- Vulnerable to hackers and malware
- They can run in centralized servers
- You don’t own the private keys in the case of custodial wallets.
- Some exchanges
- Web wallets
- Qt wallets
Wallets with Multi-currency support
Are a combination of almost all of the above concepts. Unless they are custodial wallets, you store your private keys and the way to access your funds might be through a hardware wallet, directly with your private keys or with a multisignature option.
Combination is the key
Combining the most effective type of wallets is the way to go. For example you can combine a multisignature wallet with a hardware wallet by storing the private keys offline. You can also combine a multisignature wallet with a hot wallet to increase protection and reduce risk.
Lightweight vs full node clients
Qt wallets act as nodes in whatever network they are part of, so they download the whole blockchain to contribute to the decentralization of the network. Lightweight clients reference a trusted full node so users can transact on the blockchain without downloading a full copy of it.
Most lightweight clients are mobile wallets, hardware wallets and web wallets.
I could do a whole post, and I probably will, about the web 3.0, which is using blockchain as the backend that processes all the logic and databases that allows you to interact with smart contracts, execute Dapps and transact on the blockchain. They allow this by interacting with a local or remote ethereum node, or any other smart contract based platform like EOS as well. They are in essence a lightweight client. The web3 is really a possibility thanks to these smart contract platforms that are redefining the way the internet works.
Backing up your wallet
There’s not a one solution for this so it depends on the type of wallet you chose but commonly a backup file can be an encrypted mnemonic phrase that restores your private keys that also provides an extra layer of protection before accessing to your wallet. If you are using a qt wallet, you will be able to backup the wallet.dat file to protect your funds or in some cases like with myetherwallet, you will have a paper wallet backup and your “naked” private keys to cold store. Again, this all depends on the type of wallet you chose.
So the main benefits of understanding the way to store your assets are:
- Gain protection from accidental loss.
- Retain privacy and have access to verification tools.
- Protect yourself from theft
- Be able to access a whole new internet and digital economy.