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Digital coins, even though they differ a lot from fiat coins, especially when it comes to regulations and bonds (or the lack of them) with state financial authorities, have one element in common: the necessity of a place to being stored.
In the case of fiat coins, they are stored in a bank account and their value can be traded through checks, debit and credit cards, or even via payments with the physical fiat coins themselves. The cryptocurrencies, however, are stored and traded through wallets.
Find out everything about the digital wallets.
What are wallets?
The wallets are applications or devices used to store not only the cryptocurrencies of its owners but also the public and private keys that give the users access to the Blockchain of certain cryptocurrency and allows them to trade cryptocurrencies in their wallets.
The digital wallets are essential to any trade involving cryptoassets and work as a user interface to send and receive cryptocurrencies.
What are public and private keys?
The public key is a key that encrypts the data of the message that’s been sent. When it comes to cryptocurrencies, it’s the users’ public address, known for other users of the platform to trade the cryptocurrencies. The public keys are part of a type of cryptography that uses two keys – one public and other private – to send the message: one for encrypting and other for decrypting.
The private key decrypts the message, being known only by the user that receives the cryptocurrency. It’s a random sequence of characters that can modify the balance of a wallet, working as a password for the interface to the user’s trading of cryptoassets.
As far as the digital wallets evolved, the HD Wallets (hierarchical deterministic wallets) appeared. They generate an initial sentence called seed words, which consists of 12 to 24 random words that must be memorized by the user. In this case, if the wallet is stolen or destructed the private key can be restored.
Types of wallets:
There are many types of wallets that can be grouped into two great groups. The Hot Wallets are wallets that work connected on the internet, like desktop wallets, mobile wallets, and web wallets. The Cold Wallets are those who don’t need to be connected to the internet to be used, just like paper wallets, brain wallets, and hardware wallets.
- Desktop Wallets: digital wallets that store the private key on the user’s computer.
- Mobile Wallets: wallets that store the private key on the user’s cellphone.
- Hardware Wallets: digital wallets that work offline in physical electronic devices. They must be connected to the computer or mobile device to work. Ex: Ledger Nano S, KeepKey, Trezor, etc.
- Web Wallets: also known as e-wallet, store the private keys in a web server connected to the internet, allowing the user to access them in various devices.
- Paper Wallets: physical wallets made of paper that can be created offline.
- Brain Wallets: type of wallet in which the user creates its seed words with words chosen by them, unlike the usual process in which the words are randomly selected.
- Multisig Wallets: they require more than one private key to approve the trades of cryptoassets. Commonly used in custody services that require 2 or 3 private keys to authorize the transaction.
- SPV Wallets: abbreviation that represents Simplified Payment Verification. It’s a type of wallet that works faster because it doesn’t have a full copy of the Blockchain.
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