Note 2 - How many types of wallets are there?

Updated: May 26

An overview of the different types of wallets for storing your tokens


The title is perhaps a bit deviant but certainly indicative of the confusion that exists when it comes to wallets for digital assets.


There are many ways in which wallets can be classified and differentiated from one another.


The truth is that the real difference is made by the various levels of security, which is the main distinguishing factor between wallet types, while also taking into account functionality and ease of use.


The way in which the private cryptographic keys for accessing the wallet are stored is the core of what differentiates the following wallet types from each other.


Software Wallet


The most common and widely used in the world of tokens and cryptocurrencies are software wallets, which store private keys on the user's preferred devices.


These are generally applications for mobile devices or extensions of the most common browsers.


Software wallets certainly offer a unique ease of use, as they are always at hand and therefore available in case you need to access them.


On the other hand, when installed on devices that are actively used and connected to the Internet (which is also referred to as a hot wallet), software wallets can also be vulnerable to hacker attacks.


It is therefore clear why it is not advisable to store private keys in accessible locations and obviously hold large amounts of valuable crypto-assets on these types of digital wallets.


Hardware Wallet


As an alternative, there are hardware wallets. This is a much more secure alternative as they are small devices, about the size of a USB stick, which store tokens on an offline chip (called a cold wallet).


Depending on their quality, they are considered the most secure way to store crypto-assets.


Certainly in terms of utility, a hardware wallet is less like an actual wallet and more like a safe that must first be connected to a computer and unlocked before any cryptocurrency transactions can be made.


These wallets, having also a software component and a user interface unfortunately have a higher level of complexity and not very manageable when it comes to everyday use, compared to software wallets.


However, when it comes to securely storing assets of substantial value, these components of difficulty and their purchase price become secondary.


Exchanges


Finally, we can also include Exchanges in this category.


Platforms such as Coinbase, Binance and FTX themselves offer a wallet where crypto-assets can be held, allowing you to buy and sell comfortably without having to connect an external wallet.


However, we must be aware that this class of wallet is not proprietary, can be easily hacked and inherits the risk of the platform itself.


We have seen many times in the past, exchanges failing or being blocked by the local supervisory authority and closing their accesses without warning.


On top of that, not all crypto-assets can be held in these wallets.


Basically, you have to trust the exchange to store your crypto-assets safely.


As long as you don't have the tokens in a wallet where only the owner has the private keys, you don't really own the tokens.


We always recommend that you do not hold tokens on exchanges other than those necessary to carry out your trades.


Elviria, its partners as well as other providers in the blockchain industry offer customised custody solutions that guarantee the highest level of security available.


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For more info or help please do not hesitate to contact our team at sales@epheliagroup.com.