Wallets for cryptocurrencies: An overview.

Disclaimer: The following article is for entertainment and informational purposes only. It does not constitute a recommendation to purchase any particular wallet.

Summary

There is a wide variety of wallets for cryptocurrencies, all of which have certain advantages and disadvantages, mostly resulting from a compromise between ease of use and security. Interestingly enough, a wallet does not store any currencies. Instead, a wallet consists of a private key and a public address derived from it. How little it takes to create a wallet can be seen in the example of a paper wallet. A compromise between highest security standards and ease of use are hardware wallets with certain smart features, such as the Investor Hardware Wallet.

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What are wallets for cryptocurrencies (wallets)?

First of all, the term “wallet” is actually a little bit misleading since it suggests that it stores currencies. Though unlike traditional purses, this is not the case with wallets for cryptocurrencies. Instead, wallets are used to manage cryptocurrencies and tokens that are associated with a certain address. They typically contain public and private key pairs, metadata and human readable things like labels¹. Besides this main purpose, wallets often provide additional functionality. For example, many browser extension- and mobile wallets allow you to directly exchange cryptocurrencies or NFTs and interact with smart contracts and decentralized applications (dApps). In practical terms, this means that you can use your wallet to interact with a Brokerbot to buy tokenized shares, or you can open a bank account identified by an NFT. Another specific use case is the transfer of cryptocurrencies from the Ethereum mainnet to a Layer 2² network.

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Types of wallets

With the following list we clarify and shed light on the multitude of wallets for cryptocurrencies. Let’s begin with a basic distinction. In general, there are two types of wallets: Hot and cold. A hot wallet refers to a wallet that was at least once connected to the internet. This poses some characteristic risks, as a malicious party could at least try to gain access. In contrast, a cold wallet is not connected to the internet and the private key is shielded by hardware measures such as secure enclaves³. Consequently, cold wallets are considered safer than hot wallets. Browser extension wallets and mobile wallet apps belong to the class of hot wallets, hardware and hybrid wallets are cold wallets.

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The user-friendly: Browser extension wallets

Browser extension wallets are, as the name suggests, extensions that are installed in the browser. There are a variety of providers (Phantom, Metamask, Nami) for different blockchains (Phantom for Solana, Metamask for Ethereum and Binance Smart Chain or Nami for Cardano). Browser extension wallets have the advantage that they can be easily installed and are quickly available when a dApp is accessed via the web browser. In addition, some wallets automatically detect which blockchain you are on, making it easy to switch between networks. The downside of course being that they are connected to the internet most of the time (i.e., hot). In addition, browser extensions are usually only offered in a desktop version and therefore do not work on cell phones. This second issue is solved by mobile wallet apps.

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The handy: Mobile wallets

Most browser extension wallets also come in a similar version for cell phones and work on all major smartphones. In a way, you can take your cryptocurrencies with you wherever you go. The Aktionariat Portfolio App or the Metamask mobile app fall into the category of mobile wallet apps. These wallets are therefore particularly suitable if you want to use your cryptocurrencies in day-to-day life and need them on the go. For example, you can use a mobile wallet to make payments or show the latest NFT collection to your work colleague. Due to the constant connection to the Internet, these wallets are exposed to similar risks as browser extension wallets. In order to minimize this risk, so-called cold wallets can be used. These include hardware wallets and the more exotic paper wallets.

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The more secure: Hardware wallets

Hardware wallets belong to the class of cold wallets. Many hardware wallets are similar to memory sticks with a small screen that displays the current token ownership status. Although there are models that allow some interactions with dApps, hardware wallets usually have to make compromises in terms of user-friendliness. One of the reasons for this is that the private key is stored on the hardware wallet, which must first be connected to a computer in order to sign transactions. Examples of this type of wallet are trezor⁵, ledger nano⁶ or lattice1⁷. Instead of a memory stick, one can also store her private keys on the hard drive of a computer, as is the case with Bitcoin Core⁸. However, in this instance the distinction between hot and cold wallets is becoming increasingly blurred, since a computer can be connected to the Internet quite easily. If that was the case, the private key would no longer be cut off from the outside world and one could no longer speak of a cold wallet.

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The best of both worlds: "Hybrid" wallets

A balance between security and ease of use is offered by wallets that are not directly connected to the Internet, but still incorporate smart features. In a sense, these are "hybrid" wallets. The Investor Hardware Wallet from Aktionariat belongs to this category and has the format of a credit card. As with other hardware wallets, the private key is located on the card itself, which is not connected to the Internet. However, since the card contains an NFC chip, one can simply hold it up to a cell phone in order to sign transactions on the companion mobile app. This allows you to manage your cryptocurrencies and tokenized shares with the confidence of an added level of security, but without really compromising on ease of use.

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Bonus: Paper wallets

Did you know that you can create your own wallet by flipping a coin 256 times and noting zero for heads and one for tails? It's true! Paper wallets are a speciality among wallets, and that’s the way they are created. Of course, this process is extremely time-consuming and such a paper wallet is not really practical. Still, it is a valid method to create a wallet with no downside to security if done correctly. Furthermore, it shows very well that a wallet is really only about a public address, which is created from an individual private key and a mathematical one-way function. If you would like to try this yourself you can watch this entertaining video.

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Conclusion

There are a multitude of wallets which usually fall somewhere in between the spectrum of security and ease of use. Ultimately, it all boils down to personal preference which one to take. In summary, Table 1 provides all of the above information in a neat tabular format.