Introduction to cryptocurrency wallets

tl; dr: Wallets are pairs of public and private keys, to identify and authenticate users, respectively.

Disclaimer: the introductory posts are summarized and focused on the most important aspects of crypto that everybody should know, but there are plenty of pages on the Internet providing similar information. Please feel free to skip them if you are already familiar with the concepts in them.

A blockchain is a chain of blocks, working as a database, i.e. everything that people have in a blockchain are entries in the database saying that they own some tokens. Tampering with these databases is nearly impossible1, ensuring only authorized and legit uses are in fact recorded in the new blocks.

Wallets do not store tokens or blocks, they only “store” keys2. Specifically cryptographic keys, hence the name “cryptocurrencies”. Cryptographic keys often come in pairs: public and private.

• The private key is meant to be private. This is particularly important, if you give your private key to someone, you are willfully giving your wallet, and you may not see anything in it again. Private keys are used to sign transactions, authorizing them. Someone with your private key may authorize sending all your tokens to their own wallet.
• The public key is your wallet address. It identifies your wallet, and allows other wallets and smart contracts to interact with it. The public key allows verifying the signature produced by the private key, without knowing the private key.

You may have also seen:

• A seed phrase: normally 12 or 24 words from a vocabulary of 2048 words (e.g. BIP39 standard). It allows algorithmically generating your private and public keys. You may write it down in a piece of paper (paper wallet) or memorize it (brain wallet). In any case, keep it safe and secure, it should be considered equivalent to your private key.
• A password: normally any arbitrary password that you have to use. It may provide access to some services (e.g. exchanges). Alternatively, your private keys may be stored in a file, which is encrypted using that password3.

The physical form that a wallet may take is not as important as the information corresponding to its keys, as long as it is kept safe and secure. In fact, you should have multiple copies (redundancy) of your private information, to avoid being locked out of your funds if something happens to one of them.

Your coins are in the blockchain, which means decentralized in several nodes (ideally many), and normally visible by anyone. In this sense, you cannot disconnect your wallet (as account with coins, public key) from the Internet or the blockchain, what you can disconnect is the signing device, which uses the private key, and confusingly enough receives the same name of “wallet”. We see this next week in hot and cold wallets.

— Return to index.

1

Assuming proper decentralization and implementation of the corresponding algorithms. Some people worry that quantum computers could make tampering with blockchains feasible, in the long term future.

2

It could be more appropriate to say that wallets are keys.

3

This is the weakest spot we see today.

Cross-posted from the Sigmoid newsletter