There are some common myths about cryptocurrency wallets that people may not be aware of. This article is a myth buster for a so common myth about blockchain wallets, with the basics of cryptocurrency wallets to their development of them.
Blockchain made its debut near the end of the last decade and with it came a new wave in the financial industry, Bitcoin – a cryptocurrency. Cryptocurrency is a digital currency that can be used as a digital asset to facilitate exchange over the Internet. So where can you store it? In a wallet? No.
There is a lot of misconception regarding the purpose of a cryptocurrency wallet and QuillHash is here to burst all bubbles.
When we hear the word “wallet” the first that comes to our mind is money because that is what wallets do right? They store money. With advancements and digitalization, now wallets hold credit cards that require a pin that controls the flow of the money in our account. So you can not really see the money but you can use it to fulfill your requirements through a pin.
This is what cryptocurrency wallets do.
Cryptocurrency is not directly owned by anyone but in essence, the currency exits on the Blockchain and is represented through a public key.
Every user on the Blockchain has a private key assigned to them. This private key is matched with the public key of the cryptocurrency and this determines the ownership of the currency. This means that when you transfer any cryptocurrency on the Internet, you are actually transferring the ownership of the cryptocurrency wherein the public key of the cryptocurrency is now matched against the new owner’s private key.
Therefore, the private key of a person takes the highest precedence. It is key to your cryptocurrency and needs to be stored at a safe location. Enter cryptocurrency wallets.
Cryptocurrency wallets explained
A cryptocurrency wallet is software that is built to store your private and public keys. This wallet interacts with a Blockchain network and allows you to use your digital currency for various purposes.
When you create a digital wallet, a unique address is assigned to you which represents you on the Blockchain. Using this address, you can complete transactions on the Blockchain network. This is just like an account number issued to you when you open a bank account with the difference being that the cryptocurrency wallets do not hold money but a private key to access the money.
Therefore, using a wallet address to trade on the network allows you to keep your anonymity while at the same time it maintains the integrity of the network.
Types of Cryptocurrency wallets
Wallets are of two types – Custodial and Non-Custodial. Let’s have a look at each of them and identify their appropriateness depending on different use cases.
Introduction to Custodial wallets
Having a cryptocurrency wallet exposes a person to a few but significant vulnerabilities. If a person loses his private key or the mnemonic code(used to restore access to the wallet even if the private key is lost), it means that the access to the funds is lost. These funds exist on the Blockchain but no one can access them or use them. To combat this problem, Custodian wallets were developed.
A custodian wallet is a cryptocurrency wallet maintained by a third party. This third part, known as a custodian, provides security and backup to the wallet owners with respect to their private keys. Contrary to common belief, these custodians do not enjoy complete control over your funds but they just provide a service wherein they leverage their extraordinary infrastructure capabilities to provide the utmost security for the account owners.
Benefits of having a custodian wallet
The high transaction fee is a common dilemma. Even on the Blockchain, you have to pay a considerable amount to transfer your funds. However, custodian wallets allow you to transfer funds without any processing fee. A person having a custodian wallet can make instant transfers within the ecosystem of the custodian.
Moreover, the speed of transactions has always been leveraged to charge more fees to the people. Whether it is the bank or any Blockchain platform, transferring funds faster requires a greater fee but the custodian wallets don’t charge any fee for doing instant transfers. Freewallet is the most common example of such an ecosystem.
Security comes as an obvious benefit as the core reason for using a custodian wallet is to have an unprecedented backup for your private keys so that even if you lose your key, you will not lose your funds. In addition to this, a custodian also provides support for some common problems such as providing a refund for the transaction but under certain conditions.
The whole reason for shifting to a decentralized approach is to eradicate the need for a third party but having a custodian reintroduces the concept of centralization, even for the cryptocurrency world.
A third party or a custodian can control your funds and thus enjoys a questionable power. It can freeze your fund, use your funds, or take any form of action over them. Moreover, if the custodian’s storage is exposed to any hacker, the private keys of all the participants are exposed too.
One of the main reasons for the unmatched popularity of cryptocurrencies is their ability to hide your true identity while allowing you to transfer funds. However, a custodian requires your complete information to complete a KYC and provide you with a custodian wallet. This removes the anonymity feature of the cryptocurrency world.
Introduction to non-custodial wallets
A decentralized wallet for a decentralized network, the non-custodial wallet gives you complete control over your funds. You, as a user, are responsible for your own private keys along with the mnemonic phrase that you need to restore the funds in case the key is lost. Therefore, the quote – “with great power comes great responsibility” fits perfectly into the use of a non-custodial wallet.
For using a non-custodial wallet, you have two options:
Mnemonic Phrase: it is a combination of 12-24 random words that are used to retrieve the account credentials of a person if he loses his private key. It can be stored anywhere, written down on a piece of paper or in a text file on the computer.
Private Key –The private key is an alphanumeric string that a user stores on any device.
Benefits of non-custodial wallets
Either it is the transfer of funds or withdrawal, a user can complete any action without the need for the approval of any third party. Moreover, this also allows the user to enjoy instant withdrawal as no confirmation is needed.
Low chances of a data breach
Any hacker in the world is not going to target a single person without even being sure that there is a lot of money in his account (unless the hacker has a personal grudge against you). On the other hand, if your private key is stored in a centralized location of the custodian, you are more prone to incur a data breach.
A person who owns a non-custodial wallet is under an unabated flow of stress of losing his private key. In case a person loses his key as well as the mnemonic code, he will lose all of his funds stored in the wallet. As this is non-retrievable, a user has to be highly responsible for keeping his private key and mnemonic phrase secured.
No free transactions
Unlike its counterpart, a non-custodial wallet doesn’t allow you to do either instant or free transactions in the same ecosystem.
Choosing the right Cryptocurrency wallet
Every user and every application has unique requirements which are fulfilled by either of the wallets – custodial or non-custodial. In order to identify which type of wallet fits perfectly in your use case, the following areas should be considered:
If you want to create an ecosystem where every person is his own bank and needs complete control over his funds, a non-custodial wallet should be your choice. On the other hand, if you want to provide a service to the users and facilitate a secured infrastructure to provide backup for their private keys, a custodial wallet fits perfectly. A custodial wallet can also be used in a scenario where you want to maintain governance or control over the network and want to monitor the activity of the users.
For cryptocurrency wallet development, reach out at https://www.quillhash.com/
Due to the absence of a third party, every transaction through a non-custodial wallet is directly committed to the Blockchain and hence the transfer of funds can be seen in real-time. With this, it brings the utmost trust and transparency to the table.
If using a custodial wallet, the transactions are not reflected in real-time. This may seem like a disadvantage but adding the possibility of refunds on transactions make the custodial wallet a blessing in disguise.
The extent of security depends on the approach of every user. If a user has a non-custodial wallet, his cryptocurrency funds are as secure as his private key which is in his own hands. However, if the user has a custodial wallet, the security depends on the capabilities of the custodian. In a more general view, non-custodial wallets are more secure as custodial wallets keep the private keys of every user in their possession which exposes the users to a greater chance of data breach.
Creating your own blockchain wallets
Creating cryptocurrency wallets has become as easy as creating an account on google. Outlined below are a few steps explaining how a person can create a non-custodial wallet in a few simple steps:
For this demo, we are creating a wallet on myetherwallet.com which is one of the most widely used non-custodial wallets that allows you to create and manage ethereum accounts.
- Visit the website of myetherwallet. You will see the following two options on the home
2. Click on “Create A New Wallet.” The following screen will appear.
3. Click on the Mnemonic Phrase tab to create a wallet with a mnemonic code. You will see something like this:
4. Click on the button present below this code and a popup will appear which requires you to enter the missing words from the mnemonic phrase to verify the security phrase.
5. Click the Verify button after completing the phrase.
6. Voila! Your Ethereum non-custodial cryptocurrency account is created. You can now use this account to send ethers, receive ethers, interact with smart contracts, and do much more.
You can also create a wallet in Metamask or any other application available.
Alternatively, you can develop your own wallet using certain tools and libraries such as Openzepplin, Ganache, and Truffle.