If you’re getting started in the world of cryptocurrencies, you might have heard a lot about crypto wallets and how they’re essential for doing most things on blockchain. But what exactly are they, and why are they so important?
Crypto wallets are like the wallet in your pocket, only digital. Just like you store cash and cards in your regular wallet, crypto wallets let you securely and conveniently manage all your digital assets, such as bitcoin, Ether, NFTs, and any other cryptocurrencies you may have acquired.
In this blog post, we’ll cover the essentials of crypto wallets: What they are, how they differ from more traditional forms of asset ownership, the various types of wallets, and best practices for securing digital assets. By the end, you’ll understand how to use crypto wallets effectively and why they’re essential in blockchain.
How do crypto wallets work?
Unlike your bank account, where your bank holds custody over your funds, crypto wallets give you direct control over your assets. With a crypto wallet, you can send money directly to your friend abroad without having to rely on any bank transfers whatsoever. That same level of autonomy also applies to other decentralized applications (dApps) where crypto wallets are used. You are completely in control of your assets.That control, however, also means you bear full responsibility for securing your wallet. No third party places limitations on the movement of your funds, but there’s also no third party to insure you if you lose your private keys and get locked out of your wallet.
Private keys? What are private keys, you might ask? Let’s look a little deeper into how these wallets function.
Crypto wallets typically use public keys and private keys. The public key is a string of characters that represents your account on the blockchain—almost like a bank account. It’s used to generate your wallet addresses (each wallet can have multiple), where others can send you funds. Public keys can be shared with others freely.
The private key, on the other hand, is like a super-secret password that lets you, and hopefully only you, access and manage your crypto. It’s crucial to keep this key safe and secure because anyone with access to it can control your funds. More on how to enjoy true ownership of your assets by keeping them safe and secure later.
Two major types of crypto wallets
It’s important to understand the key differences between two major types of wallets: hardware and software wallets.Let’s break down what sets them apart:
Hardware wallets: These are physical devices (like USB sticks) that securely store your private keys offline. Also known as “cold” wallets because they’re not connected to the internet, hardware wallets are much harder to hack without physical access. Popular options include Ledger and Trezor, offering a high level of security for your digital assets.
Ledger hardware wallet. Source: Amazon
Software wallets: Also known as “hot” wallets, these are applications you install on your desktop or mobile devices. They store your private keys online, making them super convenient for everyday use. These wallets offer strong security features, but they are more exposed to online threats compared to hardware wallets. Examples of software wallets include MetaMask on Ethereum, and Braavos and Argent X on Starknet.
The login popup for the MetaMask software wallet, as a Chrome extension.
Ethereum vs. Layer 2 wallets
Layer 1 (L1) and Layer 2 (L2) blockchains serve different purposes in the crypto ecosystem. The main L1 blockchains, like Ethereum and Bitcoin, are the foundational networks where transactions are settled and consensus processes occur.
Building on top of these L1 blockchains (mostly on Ethereum) are L2 solutions, like Starknet, that boost transaction speeds and reduce costs. They do this by moving the heavy computation associated with transaction execution off the main L1 chain, thereby making the transaction process faster and cheaper.
Now that we’ve got a general grip on what L1s and L2s are all about, let’s explore how their wallets work and interact with each other.
Ethereum wallets are your go-to for interacting directly with the main blockchain layer, like Ethereum. For instance, wallets like MetaMask or MyEtherWallet handle transactions on the primary blockchain, storing your private and public keys and managing your assets there.
On the other hand, L2 wallets, such as Starknet’s Argent X or Braavos, operate on L2. With these wallets, you’re doing many of the same things you can do on L1: trading and storing cryptocurrencies like ETH and STRK, staking on DeFi platforms, and playing onchcain games. Here, however, transactions are much faster and fees are much lower.
L1 and L2 wallets can interact by transferring assets between each other, usually through an external bridge, such as StarkGate. For example, you can transfer funds from your L2 wallet (like Argent X) to your L1 wallet (like MetaMask) and vice versa. This allows you to enjoy the best of both layers—L2’s scalability and L1’s security.
Feature |
Ethereum wallets |
L2 wallets |
|---|---|---|
| Blockchain level | Main blockchain (e.g. Ethereum) | Secondary layer (e.g. Starknet) |
| Transaction speed | Generally slower due to high network congestion. | Faster and higher throughput, as transactions are processed off the main chain. |
| Transaction fees | Higher fees due to high demand on the base layer. | Lower fees as transaction execution is moved off the main chain. |
| Use cases | Ideal for high-value transactions, storing large amounts of cryptos. | Great for everyday transactions, DeFi, and dApps due to lower costs and faster speeds. |
What are wallets used for?
Ok, so far so good. You’ve got a crypto wallet, but what can you do with it? Let’s break it down:
Storing cryptocurrencies
At its core, a crypto wallet is designed to stash all your cryptocurrencies, whether it’s bitcoin, Ether, or any other cryptocurrency. Unlike a physical wallet, it doesn’t hold the coins but keeps the private keys needed to access and manage them. Think of it like a secure digital vault for your digital cash. When it comes to storing cryptocurrencies long-term, some people prefer hardware wallets for their ironclad security.
Sending and receiving transactions
A primary function of a crypto wallet is to facilitate transactions. Whether sending bitcoin to a friend or paying for something online with Ether, your wallet handles it by using your private key to sign transactions. Of course, make sure to double-check the recipient’s address—once you hit send, there’s no undo button.
Accessing dApps
Crypto wallets aren’t just for managing your coins—they also let you tap into the world of dApps. These blockchain-based apps offer everything from financial tools to games. Your wallet acts as your login credential, enabling secure and seamless interaction with these apps.
Participating in DeFi
DeFi is a game changer in the world of finance, and your crypto wallet is your ticket to this world. With it, you can lend your crypto to earn interest, borrow against your holdings, trade on decentralized exchanges, and participate in yield farming, all on the blockchain for maximum flexibility and control.
Managing NFTs (non-fungible tokens)
If you’re into digital art, collectibles, or virtual assets, your wallet helps manage NFTs (non-fungible tokens). NFTs are unique digital items you can buy, sell, and trade. Whether it’s digital art or a virtual pet, your wallet tracks your NFTs, proving ownership and allowing you to showcase or trade them anytime.
Best practices for using crypto wallets
A few simple steps can make a big difference when it comes to keeping your crypto safe. Think of your crypto wallet as a high-security vault—you want to make sure it’s as secure as possible.
Security tips
- Enable two-factor authentication (2FA): Always activate 2FA. It works like a second lock on your vault—just in case. You’ll get a code on your mobile or email, which you’ll need to enter along with your password. This extra step makes it much harder for anyone to break in.
- Keep software up-to-date: Just like updating your phone’s apps, keeping your wallet software updated to the current version ensures you have the latest security patches and fixes. It’s an easy way to stay ahead of potential threats.
- Use strong, unique passwords: Create a strong password for your wallet and avoid using the same password across different accounts. Make it complex with a mix of letters, numbers, and special characters. Aim for something at least 12 characters long.
- Store passwords and private keys in a safe location: Use a password manager or written copy stored in a secure location.
- Be careful with public Wi-Fi: Avoid accessing your wallet over unsecured networks if you can. A secure, private connection is always better for keeping your credentials safe.
Backup strategies
Backing up your wallet is just as important. When you set it up, you’ll get a seed phrase—words that can recover your wallet if needed. Write this down and store it in multiple safe places. Don’t keep it on your computer or phone where it could be hacked.
Creating extra backups of your wallet’s recovery seed phrase or private key on encrypted external drives or hardware wallets is also a good idea. This way, even if something happens to your primary backup, you still have other options. And don’t forget to test your backups from time to time to make sure they work properly.
Avoid common scams and pitfalls
When it comes to crypto, be on high alert. If you get unexpected emails or messages asking for your wallet info, double-check before you click or respond. Always download wallet apps from official sources or reputable app stores to avoid the shady versions. And watch out for too-good-to-be-true offers or investment schemes—these are often tricks to get you to share personal info or send money.
Regularly check your wallet activity for any unusual transactions. If something looks off, act quickly to secure your wallet and investigate.
Conclusion
Crypto wallets are vital for navigating the blockchain space, providing you with the tools to securely store, manage, and transact with your digital assets. From holding cryptocurrencies to engaging with dApps and managing NFTs, the right wallet can significantly enhance your experience.
When choosing a wallet, think about your needs—whether it’s basic storage or advanced functionalities like DeFi participation. Prioritize security by enabling features such as two-factor authentication and properly backing up your seed phrases.
Now that you’ve got a good grasp on crypto wallets, here are some resources to help you level up your wallet game!
Ethereum:
- MetaMask: A popular choice for ether and ERC-20 tokens. It’s user-friendly and integrates well with many dApps.
- MyEtherWallet (MEW): Offers more control with a web-based interface, perfect for those who want direct interaction with the Ethereum blockchain.
Starknet wallets:
- Braavos: Makes managing assets a breeze with a focus on user-friendly experience and top-notch security features.
- Argent: Combines robust security with an easy-to-use interface, perfect for navigating your digital assets and DeFi activities.
For those who want to dig deeper, check out the following guides and tutorials:
- Getting started using Starknet: Setting up a Starknet wallet
- How to set up a hardware wallet
- How to bridge funds to Starknet – Wallets
- Wallet integration for dApps
Contact information for questions or support
If you have questions or run into issues, don’t hesitate to check the Starknet Discord community.
