Crypto wallets are a user’s key to the blockchain — allowing you to access and interact with decentralized applications, store digital assets (like NFTs) and cryptocurrencies, and more.
In this blog post, we’re going to dive into everything you need to know about crypto wallets in web3. We’ll cover what a crypto wallet is, what the different types of wallets are, and why they are all important in enabling accessibility to the crypto space. We will also briefly go over how to get started with whichever option suits your needs (or those of your users) best.
What is a web3 wallet?
A crypto wallet (or cryptocurrency wallet) is a digital or physical device that stores your private keys, which are used to access and manage cryptocurrency and blockchain-based assets, like NFTs. A private key is a unique code that is generated for each wallet, and is required to access the funds and assets stored in that wallet. Without a private key, it is not possible to access or transfer the digital assets stored in a wallet.
Cryptocurrency wallets also enable digital identity, providing users with a unique set of cryptographic keys — also known as a “private key” and a “public key” that are used to prove ownership and control of digital assets.
What are “private keys” and “public keys”?
A private key is a secret piece of information that is used to prove ownership of digital assets. It is used to sign transactions that are sent to the blockchain, and it is only known to the owner of the digital assets.
A public key is a piece of information that is used to prove that a transaction was signed by the owner of a digital asset. It is used to verify the authenticity of transactions and can be shared publicly.
How do cryptocurrency wallets work?
When a user creates a cryptocurrency wallet, they are given a unique private key that is used to prove ownership of their digital assets. This private key is then used to generate a corresponding public key, which can be used to verify the authenticity of transactions. By using these keys together, a cryptocurrency wallet can enable digital identity and prove ownership of digital assets in a secure and decentralized way.
Cryptocurrency wallets also enable digital identity by providing users with a unique address, also known as a "public address", that can be used to receive digital assets. This address is derived from the public key and can be shared publicly, allowing others to send digital assets to the user's wallet. By providing a unique public address, a cryptocurrency wallet can enable digital identity and prove ownership of digital assets in a secure and decentralized way.
This public address can also be tied to a decentralized name service — making it easier for others to remember and interact with your wallet’s public key. For the Ethereum blockchain, for example, you can register an .eth domain to your wallet through the Ethereum Name Service (ENS). In this way, someone is able to send a digital asset to your wallet by “addressing” it to your .eth domain, rather than your public key — which is a string of randomized numbers and letters.
What are the different types of cryptocurrency wallets?
Crypto wallets are not all built the same, and nowadays, there are more options than ever for users to access and interact with the blockchain depending on their needs.
To understand this further, let’s look at the different types of crypto wallets, what their use cases are, and why they’re important:
Hot Wallets vs. Cold Wallets
What is a hot wallet, or software wallet?
A hot wallet is a type of cryptocurrency wallet that is connected to the internet. This allows for easy access and management of the funds stored on the wallet, but also makes it more susceptible to hacking and other security threats. Hot wallets are typically used for the storage of small amounts of cryptocurrency that are frequently traded or spent, as opposed to cold wallets which are offline and used for long-term storage of large amounts.
While functionality remains the same, there’s also a distinction to be made between desktop wallets and mobile wallets (though some can be accessed on both):
A desktop wallet is a type of cryptocurrency wallet that is installed on a computer or laptop. These wallets allow users to store, manage, and trade their cryptocurrency directly from their desktop or laptop computer. They can be a software-based wallet, where the user download the wallet application and install it on their device, or a web-based wallet that can be accessed via a browser. Desktop wallets are considered to be more secure than online wallets, but less secure than hardware wallets as they are connected to the internet and can be vulnerable to hacking, malware or phishing attacks.
A mobile wallet is a type of cryptocurrency wallet that is designed for use on a mobile device, such as a smartphone or tablet. These wallets allow users to store, manage, and trade their cryptocurrency directly from their mobile device. They can be a software-based wallet, where the user download the wallet application from an app store and install it on their device, or a web-based wallet that can be accessed via a mobile browser. Mobile wallets are convenient to use as they allow the user to access their funds at any time and place, but they are considered less secure than hardware wallets as they are connected to the internet and can be vulnerable to hacking, malware or phishing attacks.
Examples of hot wallets, or software wallets
- Coinbase Wallet (different from Coinbase Exchange which is custodial)
- Rainbow Wallet
- Trust Wallet
- Frame Wallet
- Glow Wallet
What is a cold wallet, or hardware wallet?
A cold wallet, also known as a cold storage wallet, is a type of cryptocurrency wallet that is not connected to the internet. This offline storage method provides a high level of security for the funds stored on the wallet, as it is much more difficult for hackers to access the funds. Cold wallets are typically used for long-term storage of large amounts of cryptocurrency that is not frequently traded or spent.
Cold wallets are usually synonymous with hardware wallets. Hardware wallets are physical devices, like USB drives, that store the user's private keys. Hardware wallets are mePros include enhanced security, and cons include the need for physical storage and increased difficulty in accessing funds.
Examples of cold wallets, or hardware wallets
Non-Custodial Wallets vs. Custodial Wallets
What is a non-custodial wallet?
A non-custodial wallet is a type of cryptocurrency wallet in which the user holds the private keys and has full control over their funds. This means that the user is solely responsible for the security of their funds and no third-party, including the wallet provider, has access to them. In contrast, a custodial wallet is one in which a third-party, such as an exchange, holds and controls the private keys on behalf of the user. Non-custodial wallets are considered to be more secure than custodial wallets, as they eliminate the risk of the funds being compromised or lost due to the actions or security breaches of a third-party. Non-custodial wallets can be software (desktop, mobile, and web) or hardware wallets.
Examples of non-custodial wallets
A custodial wallet is a type of cryptocurrency wallet in which a third-party, such as an exchange, holds and controls the private keys on behalf of the user. This means that the user does not have full control over their funds and the third-party, such as the exchange, has access to them. This also means that the user is not solely responsible for the security of their funds, but also the third party. In contrast, a non-custodial wallet is one in which the user holds the private keys and has full control over their funds. Examples of custodial wallets include many exchanges that allow buying, selling or trading cryptocurrencies, or some online and mobile wallets that are offered by a specific company or organization.
Examples of custodial wallets
- Coinbase Exchange (different from Coinbase Wallet which is non-custodial)
- Kraken Exchange
- Reddit Vault
What is an email wallet?
Email wallets are a subsection of custodial wallets, and they have gained significant traction recently due to the frictionless user onboarding and adoption that they enable for web3 products.
Email wallets allow users to sign up for, log into, and create cryptocurrency wallets using their email addresses — making it very easy for users to use blockchain-based apps without any prior crypto experience. Becuase of this, many companies opt for custodial email wallets, taking care of security and the blockchain complexity for users that are unfamiliar with, or do not have, a traditional cryptocurrency wallet.
The most popular email wallet provider is Magic. You can learn more about it, and how to allow users to create email wallets, in this guide:
Smart Contract Wallets
What is a smart contract wallet?
Most conventional cryptocurrency wallets are Externally Owned Accounts (EOAs), meaning they are controlled by a private key (which you can think of as a password). Smart contract wallets, on the other hand, are built on top of smart contracts, which enables security functionality that EOA wallets do not have. This is made possible by a concept called account abstraction.
If a wallet is controlled by a smart contract, then it is programmed by that smart contract’s code. This makes it possible to program features into the wallet like social recovery, transfer limits, and account freezing for added usability and security.
One specific category of wallet that is enabled by smart contract wallets, and is growing in popularity, is multi-sig wallets — which are worth expanding on further as they have various use cases for companies and organizations, when more security is important.
Multi-Sig (aka Multi-Signature) Wallets
What is a multisig wallet?
Multisig wallets are smart contract wallets that require more than one signature to authorize a transaction, enabling added security for the funds or assets stored within a wallet. Multisig wallets are managed by trusted third parties — like friends, family, or coworkers — that need to approve a transaction for it to go through.
This makes it harder for a bad actor to hack the assets in your wallet, since they would need to have access to each party’s wallet address (or the majority, if the multisig wallet requires a majority amount of signatures).
Pros include an added layer of security, but cons include the need for multiple parties to sign off on transactions, which can slow down the process.
Examples of smart contract and multisig wallets
What is an MPC wallet?
Multi-Party Computation, or MPC, allows two or more parties to compute without revealing any private information to one another.
For crypto wallets, MPC wallets replace a wallet’s private key with multiple, independently-created “secret shares.” This allows a safe self-custodial option for users since you do not need to worry about losing your private key or seed phrase.
You can learn more about MPC wallets in the following guide:
Examples of MPC Wallets
Conclusion: Which cryptocurrency wallet is best?
The best crypto wallet for you will depend on your specific needs and preferences:
- If you’re looking for maximum security and long-term storage for large amounts of cryptocurrency or valuable digital assets, a hardware or cold wallet is likely the best option. Options include Ledger and Trezor.
- If you need a wallet that is convenient to use and accessible from anywhere, a software or hot wallet for both mobile and desktop will be more suitable. Options include Coinbase Wallet, MetaMask, Phantom, and Rainbow Wallet.
- For organizations and more technical use cases that require even further security, there are solutions like smart contract wallets and multisigs.
- For companies that want easy user onboarding regardless of web3 experience, email wallets like Magic are a great option.
Ultimately, the best wallet for you will depend on your specific use case and the level of security and control you are comfortable with. It's also important to consider how much you trust the wallet provider, whether it's open-source and has a good track record of security.
We hope this blog post has helped you understand what the different types of crypto wallets are, what they’re used for, and which ones may be the best for you depending on your needs.