11. Digital Wallets

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Up to this point we have seen how our currencies have evolved, and how blockchain, smart contracts and tokens help to make this new digital world possible. One aspect we have not covered is where to store your tokens and other cryptocurrencies for the purpose of transacting between parties.

In our discussion prior to digital wallets, we recognised the role banks play in society. They act as a means to store money, but also as a gateway to facilitate transactions. Banks verify the amount of money in your account, and enable you to do transactions between parties. They are the trusted intermediaries through which we transact.

Blockchain and smart contracts are the building blocks for distributed ledgers, removing the need for trusted intermediaries. But how do we actually interact with the blockchain for sending and receiving payment? In the world of crypto’s and blockchain, you have a decentralised equivalent to a bank account: blockchain wallet (or an e-wallet).

Currently, anyone can go to a bank of choice and open an account. Each account is identified by a unique number (account number), and funds are stored and withdrawn from than account by means of using the account number (or a credit and debit card) in combination with a pin code. The owner of the account can share their account details to receive payment from others, and they use their debit or credit card to transfer money to another entity. The only way to access the funds is to have the account number or card number (which is public), paired with a password or pin code (which is private). The combination of public and private codes give anyone access to the account and the money stored in the account.

 

What is a digital wallet?

A blockchain wallet (e-wallet) is a tool that you use to interact with a blockchain network. It is a digital wallet that allows users to store and manage their digital money (tokens or cryptocurrencies). A blockchain wallet allows the transfer of cryptocurrencies between users, and it has the ability to convert them back into a user’s local currency [29].

An e-wallet can take the form of software (hot wallet), or hardware (cold) wallets (depending on their working mechanisms). Figure 1 is an example image of the different wallet types. An e-wallet does not so much store your digital currency, it much rather acts as a means of interacting with the blockchain, by keeping track of transactions instead. An e-wallet generates all the necessary information to send and receive cryptocurrency via the blockchain [29].

Figure 1

The majority of crypto wallet providers are based on software, which make them more convenient than hardware wallets. Hardware wallets tend to be the most secure alternative.

Hot wallets and Cold wallets

Hot wallets are those that are always connected to the internet [30]. They are easy to set up, and they are perfect for those who are regular crypto traders. Funds are easily accessible. Since hot wallets are connected to the internet, they are vulnerable to hacking and therefore need to be fortified with multi-layer security. Hot wallets are mostly software-based and live on desktops, websites or mobile devices.

Cold wallets are not always connected to the internet [30], and can be connected when a user needs to process any transactions.

These cold wallets take the form of physical hardware device that connects to a computer and they can take the form of paper wallets (printed document containing wallet information).

Multisig wallets

A multi-signature wallet, also known as a multisig wallet, requires two or more co-signers to validate a transaction. This feature enhances the security of the wallets and eliminates the problem of a single point of failure [30]. Multi-signature wallets are recommended when developing a distributed autonomous organisation.

Our e-wallet is identified by an alphanumeric identifier (called an address) that is generated based on public and private cryptographic key pair. A wallet address is the location on the blockchain to where coins are sent. The wallet address is shared with others to receive funds. A user keeps their private key private and share it with no one. The private key is the cryptographical equivalent of a password or pin code, and the public key (address) is the same as your account number. The owner of the wallet use their private key to unlock their wallet to access the funds recorded in the wallet.

If someone might lose their device or log in details, all they need to access their funds are their private key. Furthermore public keys do not only need to point towards you wallet address to store your digital money. It can also be used to point towards a smart contract on the blockchain, and the execution of the smart contract can be initiated by means of a multi-signature authentication.

In the final article in our Navigating Blockchain series we will take a look at the space where all of these concepts intersect, called distributed autonomous organisations (DAOs).

** The rest of the series will be published on medium.com and on our website.

 

References:

[29] J. Frankenfield and J. Mansa, “What Is a Blockchain Wallet?”, Investopedia, 2021. [Online]. Available: https://www.investopedia.com/terms/b/blockchain-wallet.asp. [Accessed: 19- Jul- 2021].

[30] “Types of Cryptocurrency Wallets: Which One is the Right Choice for Your Business”, Antier Solutions, 2021. [Online]. Available: https://www.antiersolutions.com/types-of-cryptocurrency-wallets-which-one-is-the-right-choice-for-your-business/. [Accessed: 19- Jul- 2021].

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Yknot Blockchain Solutions

Yknot Blockchain Solutions

This article was written by Yknot Blockchain Solutions for educational purposes. We know the ropes when it comes to building blockchain-based solutions on the Telos network. Contact us to get all hands on deck for your next expedition.

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