The cryptocurrency wallets or purses are the bridge that allow us to manage our cryptocurrencies. A piece of software or hardware with which to carry out the receiving and sending operations through the blockchain network of each cryptocurrency.
One of the most important elements in the cryptographic world and of blockchain technology are wallets or purses. The use of these tools is essential when managing our cryptocurrencies. That is why choosing a suitable one that meets our needs is as important as having one. For this reason, in this article we will share the most important and fundamental information that you must know to understand what wallets are and how they work.
The term wallet refers to a wallet, wallet or virtual purse in which we can manage our cryptographic assets. It is a software or hardware designed exclusively to store and manage the public keys and private keys of our cryptocurrencies.
How do cryptocurrency purses or wallets work?
As we already mentioned, wallet or cryptocurrency purses are one of the most important and indispensable elements when operating with them. This is because they are the ones that allow us to send or receive payments in crypto assets.
Unlike the traditional financial system, Bitcoin and other cryptocurrencies are fully digital currencies that do not exist in the physical world and that work based on cryptography. Therefore, the design of the wallets is of vital importance in order to operate and manage our funds. And although the term wallet seems similar to the one we use to store our physical money, the truth is that in cryptocurrencies, what is really stored in the wallets are the public and private keys.
Cryptocurrencies as such do not exist as currencies, but rather as transaction records contained within a blockchain that is operated by interconnected nodes around the world. So, the public keys and above all, the private keys within a wallet are what give us the ownership and right over the cryptocurrencies transferred to a particular address. Let’s look at this in more detail:
- The public key is similar to a bank account number. We can give it to anyone to send us money, without the risk that they can withdraw our funds. Through the public key addresses are generated to receive, consult and view the status of our funds.
- The private key works as a kind of key, a PIN or password that we should not reveal to anyone, since it gives us the right to spend the cryptocurrencies contained in an address. Thus, the owner of the private key will be the owner of the funds and have full control over them.
The wallets or purses use advanced blockchain encryption techniques to grant and guarantee total security to users. In this way, the wallet can save, send and receive cryptocurrencies without greater risk.
When setting up a wallet, the first thing to do is create a private key using a secure algorithm. For example, through the ECDSA algorithm using the elliptic curve secp256k1. Or the EdDSA algorithm can be used. In either case, the goal is to provide a high level of security. This is thanks to the fact that both methods allow the creation of almost infinite combinations and with a high degree of difficulty. This makes them practically impossible to guess or be attacked by force.
After the generation of the private key, the public key is created, which is mathematically related to the first. And from the public key the addresses where we can receive cryptocurrencies are generated. However, it is important to note that although the public key is generated and is related to the private key, the reverse process cannot be done. In other words, we cannot deduce the private key from the public key, since the algorithm used for creation is unidirectional.
Likewise, there are deterministic wallets (HD wallets) that when they are configured for the first time, they generate a seed. From which all keys and addresses are generated. Later it will serve us to restore, recover the purse and our funds in case of damage or loss of the equipment. These seeds are a kind of code that is represented by mnemonic words generally in English. In order to provide greater ease when making backups.
As a curious fact, it is important to point out that both the public and private keys generated in a wallet are not related to the cryptocurrency protocol. If not rather, take shelter within the hardware that operates them and never leave the device. However, the level of security provided by a wallet will depend on the type that is being used, be it a hardware wallet, paper wallet, light wallets, software for desktop, tablet or smartphone, or online.
Usefulness and importance
As bitcoin and other cryptocurrency systems are completely decentralized, there is no entity or body that controls them. That is why wallets play a very important role in this ecosystem. They are a piece of basic infrastructure that allow us to operate with cryptocurrencies. In them we can see and consult our balances, in addition to the operations carried out and received. They also allow us to operate our funds with absolute control over them. We do not need the permission or authorization of any third party to perform an operation.
In addition to providing us with security and confidence to carry out our operations, wallets also allow us to sign transactions without the need for private keys to leave the device. When we make a shipment to a person, we are transmitting a value in the form of a transaction. Therefore, we are transferring ownership of a certain amount of money to that person. In order for the network to confirm the transfer and the recipient can use the funds, a digital signature is required. In this way, it will be verified that whoever carries out the operation owns the funds and not a third party.
How to choose a wallet or purse?
Before operating with a wallet for our cryptocurrencies, it is necessary to know the types that are available in the market. Study the advantages and disadvantages offered by each of them, to determine which is the one that best suits our needs.
With the creation of Bitcoin and later the development of many other cryptocurrencies, the need arose to have a wallet that would allow us to operate digital money. And to choose the one that best suits us, it is necessary to study the available projects. The first of these developments led to the creation of full wallets or full clients. These are the most complex wallets and also one of the safest in the world of cryptocurrencies.
Cold wallets, hardware or paper type, are undoubtedly those that provide a higher level of security when it comes to safeguarding our funds. they operate offline and therefore there is no risk of them being hacked or hacked. Becoming ideal and preferred by many to deposit large sums of money. The best known hardware wallets are the Trezor and the Ledger, choose the one that best suits your security and price needs. For their part, hot wallets, such as desktop, tablet or smartphone are better for daily operations. These are always connected to the blockchain, and therefore, to the Internet, they are susceptible to computer attacks.
Finally, the least recommended for the security levels they offer are online wallets or hot wallets. They are platforms that operate directly from a website and that in most cases, the custody of private keys is in the hands of third parties. However, many allow you to configure extra layers of security in order to provide greater confidence in your users.
There are also simpler wallets such as SPV wallets or light wallets. Their main mission is to make the handling of wallets easier and require fewer resources in their execution and work.