Cryptocurrency Wallets: An Introduction

If you’ve ever decided to invest into any kind of cryptocurrency, then you’ve automatically been exposed to the cryptocurrency wallet – or Crypto Wallet for short. This is a piece of software designed to keep track of your secret keys that are used to digitally sign the cryptocurrency transactions you do. And since these keys are the only way to verify that you have ownership of these digital assets, then they’re definitely an integral part of this ecosystem.

 

With that being said, what does a crypto wallet actually do? Well, not only does it keep track of all your encryption keys that are used to sign transactions, but it also stores the address on a blockchain where a particular asset is located. In case the owner loses this address, they essentially lose control over their cryptocurrency, or any other asset held at that address.

 

When it comes to the different types of crypto wallets, there are two main ones. Hardware and Software based wallets, also known as cold and hot wallets, respectively. Hot storage wallets are usually accessible through internet services, and there are many out there from which to choose from. These hot wallets can also be divided into online wallets and client-side wallets.

 

On the other hand, cold wallets are downloaded and remain offline on a piece of hardware such as a USB or smartphone. These too can be further divided into crypto-assist type wallets, which handle the keys and data signatures, while the others only handle generating and completing transactions.

 

That being said, we’ve tried to understand which one is more secure. Well, the cold storage wallet is innately more secure than a hot wallet, simply because the cold storage isn’t connected to the internet, so there’s no way anyone can access your information. Most cryptocurrency attacks had occurred when hackers hit internet linked accounts and transferred the keys over to their side.

 

Here’s an example that’ll help you better visualise what I’m trying to tell you; in April 2014, a major crypto theft occurred as the Japanese online crypto exchange Mt. Gox lost 850,000 bitcoins valued at more than $450 million from its hot wallet. Similarly, in 2018, bitcoin exchange service Coincheck suffered a theft of almost $1 billion worth of cryptocurrency from its hot wallet service. So, with that in mind, the cold storage version has proven itself to be better for that specific reason.

 

Still, there are ways to make hot wallets more secure. One of the ways is to enable two-factor authentication through push notifications. This would allow you to bind the second factor to a registered smartphone or email, so when the owner of the wallet tries to sign in, only via this phone is the owner able to authorise the login. The login process can’t be done any other way.

 

There are a few other instances when hackers have gone to great lengths to steal keys from wallets, as far as cloning the SIM of a phone to gain access to a specific wallet. In the end, determined criminals will go to great lengths to circumvent all precautions taken. That’s why, the most reliable form of storage remains within the cold storage area. However, that’s not to say they’re the safest either.

 

The danger of losing keys is something that cold-wallet owners suffer from. As stated earlier in the piece, when you lose your keys, then you’d lose all your assets that are stored on the blockchain and wouldn’t be able to verify that you are, indeed, the owner of these assets. Hot wallets don’t have that problem, because if you lost your keys “by chance”, the provider of this service would propose a “Challenge-And-Answer” questionnaire allowing you to recover these assets.

 

Since the entirety of the blockchain ledgers work on the trustless consensus mechanism, you don’t need to know the person or people you’re dealing with on the ledger in order to complete the transaction. The trust is gained from the valid secret key, that’s why protecting your keys is such an important aspect of the crypto wallet.

 

There has been some research into what these crypto wallets are used for, beyond the scope of digital currency storage. Now the vast majority of crypto wallets are used to store coins, like bitcoin, Ethereum, Litecoin, Ripple, etc., yet it turns out that you can actually use these wallets to store the keys for other assets such as NFT (Non-Fungible Tokens).

 

This means that a token or key stored on the wallet could represent anything from concert or plane tickets to goods in a supply chain, virtually anything with a digital value attached to it. This means that any person having possession of an encryption key – which is proven via a digital signature – authorises the transaction.

 

In the future, when there’s a global adoption of blockchain technology, a new, “trustless” global economy could be based on blockchain and crypto wallets. Can you imagine the possibilities and options that’ll be created? Technically, this can enable “trustless” individual financial or professional histories, tax information, medical information, or consumer preferences to corporations maintaining employee or partner digital identities and controlling application access.

 

Digitised representations of traditional identity documents such as driver’s licenses, passports, birth certificates, Social Security/Medicare cards, voter registration info and voting records could also be stored in crypto wallets, giving owners control over who has access.

 

The notion of adoption of “trustless” blockchain technology and extending it to several domains is making these crypto wallets even more valuable and adding to the urgency of making them much more secure.

(Note: The above thought piece covers the wider VA industry, and may not be an activity that Arabian Bourse Limited (ABX) is looking to be licensed to undertake.

ABX has received in-principle approval from Financial Services Regulatory Authority of Abu Dhabi Global Market (ADGM) and is currently in the process of obtaining an FSP. ABX aims to be the first of its kind fully regulated, virtual asset MTF and custodian in the region focused on institutional and retail investors.)

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