What are Cryptocurrency Wallets and How do they Work?

Cryptocurrency users today are showered with benefits of feature-rich technology that make cryptocurrency software and hardware wallets much simpler to use as compared to only a decade ago. Though we do owe thanks to Satoshi Nakamoto, who engineered the first cryptocurrency wallet back in 2009, which proved resilient for years to come and ultimately iterated to wallets that exist today.

Today, with the ease of access to digital currencies, a speculated maturity in the market along with booming popularity fuelled by Elon Musk – cryptocurrency wallet users are exploding in numbers.

68 million wallet users exist worldwide as of 2021, a quantity that was just a few thousand 10 years ago, according to Statista. With these currencies taking full form in today’s digital world, if you are an outsider looking in to get your hands dirty and experiment, it is essential to understand what are cryptocurrency wallets and how blockchain technology makes transacting with them so easy.

What is a cryptocurrency wallet?

A cryptocurrency wallet is a software programme or application that allows its users to store and access their digital assets or currencies like bitcoins, somewhat like a bank account. So just as we store our physical cash in a wallet, these cryptocurrencies are located digitally, on our mobiles or computer desktops. In theory this stands true, but practically cryptocurrencies are not stored anywhere! Every individual who has some balance in their crypto wallet can access their coins through a private key or a ‘classified number’ that corresponds to that specific wallet’s address (public key).

Cryptocurrency wallet or bitcoin wallets

How do cryptocurrency wallet transactions work?

Before we jump into the process, it’s worth understanding how the ‘public key’ and ‘private key’ of a crypto wallet works. Whenever you create a crypto wallet you are given a private key and public key associated to your wallet, that is a string of alphanumeric code. This could simply be compared to how you would send and receive emails. The email address could be seen as the public key that allows individuals to send you emails, but the email address would not allow just anyone to access your email. That is only possible with your password, and in the case of crypto wallets, your ‘private key’. 

But how exactly do these keys help carry out pseudo-anonymous transactions from your wallet that publicly reveal transaction amounts, while keeping transactors encrypted? Let’s get into the process step-by-step.

The individual executing the transaction must have access to their public and private key. They use their wallet to transfer funds, like a specific amount of bitcoins, to another wallet by utilising the public key or address of the wallet that will receive the digital currency. 

The transaction is now pending while it is sent to the cryptocurrencies network where it is queued up, awaiting to be added to the public ledger. This is the process of confirming transactions, which is done by the computers maintaining the network, also known as ‘miners’. Once the transaction is verified, it is stored on a public ledger by a process known as ‘mining’. Many transactions or ‘blocks’ of them are added to the ledger at once by miners. Each block is added sequentially which is why the ledger and the tech behind it is known as ‘block – chain’. 

Once added to the blockchain, the individual who’s cryptocurrency wallet address is associated with the transaction amount will receive the cryptocurrencies and is free to spend it!

Steps explaining how cryptocurrency wallets like a bitcoin wallet's transactions work
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Though the basis of executing transactions are essentially the same across cryptocurrency wallet platforms, the wallet you hold on your mobile compared to the one on your desktop are not all the same! There are a few types of wallets that exist today.

So, what are the different types of cryptocurrency wallets?

Desktop Wallets 

As the name suggests, a desktop wallet is a software that can be downloaded onto your desktop and execute locally on your computer. These wallets act as an address for the wallet owner to send and receive digital coins. These types of wallets also give you full control over your keys and allow you to store your private key as well. Some examples of desktop wallets are, Electrum and Armory.

Mobile Wallets 

Though quite similar to their desktop counterparts, these wallets are built primarily for an alternative utility. These wallets are stored on your mobile as an application and allow you to transact through a ‘ touch-to-pay’ mechanism made possible through near field communication (NFC) by scanning a QR code. These wallets allow for daily and more frequent transactions. Trust Wallet is a good example for a mobile wallet.

Web Wallets 

Web wallets offer the convenience of accessing your wallet from anywhere through a web browser or mobile device, without the need to install anything. However, this could be dangerous in some cases, as certain providers store and manage your key online on your behalf. Coinbase and Blockchain are some popular web wallet providers.

Hardware Wallets 

Hardware wallets are physical wallets that are considered to be the safest alternative to range digital wallets. Though it could be argued that they are relatively less user friendly, they do offer the benefit of being practically immune to virus attacks! These devices can be plugged into your computer device like a USB and have keys stored within themselves. However, these wallets are the only ones that are not free of cost and could range from $100 to $200.

Today crypto wallets go well beyond staching your cryptocurrencies. Its growing momentum in the ecosystem could lead it to end up being nearly as predominant as the browser is to the web. Financial institutions like MasterCard and Bank of America are capitalising on the rampant growth of these currencies to introduce crypto wallets of their own. In today’s digital era, it is impossible to escape the fact that all these trends beckon us to a single unspoken truth – cryptocurrencies are here to stay if not change the payments landscape forever.

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