What is a Blockchain Wallet and How Does it Work?

By Ehis Ohiwerei

Key Takeaways

  • A digital blockchain wallet lets people store, manage, and trade their cryptocurrencies online.
  • Blockchain offers a wallet service called Blockchain Wallet, an e-wallet designed for storing and transferring cryptocurrencies.
  • People who use a blockchain wallet can keep track of their Bitcoin, Ethereum, and other digital assets in one place.
  • Transaction fees charged by Blockchain Wallet are dynamic and may vary based on factors like transaction size.
  • To prevent theft, Blockchain Wallet includes several security features, including measures to guard against insider threats from company employees.

Understanding What a Blockchain Wallet Is

In simple terms, a blockchain wallet is an essential component of the blockchain industry that keeps track of the private and public keys for all the bitcoins you own. It’s important to note that this digital wallet doesn’t physically store any coins or currency.

Rather, it’s a safe and secure place to store and manage your cryptocurrencies, such as Bitcoin and Ether. Blockchain Wallet is a specific wallet service provided by a software company called Blockchain, which Peter Smith and Nicolas Cary founded. With a blockchain wallet, you can easily transfer your cryptocurrencies and convert them back into your local currency if needed.

How a Blockchain Wallet Works

To create an e-wallet with Blockchain Wallet, you don’t have to pay a cent. All you need to do is complete the account setup process online. To get started, you must provide an email address and password to manage your account. Once you’ve signed up, the system will send you an automated email asking you to verify your account. After that, you’ll be given a Wallet ID, a unique identifier similar to a bank account number.

You can access your e-wallet by logging into the Blockchain website or downloading and using the mobile app. Once you’re in, you can view your wallet balance for all your cryptocurrencies and your most recent transactions. Blockchain wallets are secured using cryptography, which generates a public and private key pair to keep your crypto safe and secure. Here are a few things to note about the workings of a blockchain wallet.

  • When you share your wallet address with someone, they can send you coins or cryptocurrencies by assigning them to your public address. It’s important to note that your public address is a hashed version of your wallet address, not the address itself. To create a public address, a hash function encrypts the input into an output that is not known to the public but is associated with your wallet address. This adds an extra layer of security to your transactions and helps keep your wallet address safe from potential threats.
  • Your private key is linked to your public key and wallet address. It’s the only key that can be used to decrypt the information that the sender of the coins encrypted. This allows you to unlock the contents of your wallet and access your cryptocurrencies. In simpler terms, consider your private key the key to your safety, which only you can access. It keeps your cryptocurrencies secure and allows you to manage your digital assets easily.
  • When you send out crypto, you will use your private key to sign the transaction before sending it to the blockchain network. Once the transaction is sent out to the public network, the nodes in the network verify the transaction using the associated public key, which is available publicly. This ensures that the transaction is genuine and valid before it’s allowed to go through. Each transaction generated using a private key has a unique digital signature, making it nearly impossible to copy or be the same as any other transaction, even if the same private key generates multiple signatures. 
  • When you send crypto to another person, it is confirmed to the recipient that the crypto is assigned to the sender’s public key, which is associated with their wallet address. To access the amount sent, the recipient will use their private key to unlock it, which will then be reflected in their wallet. This means that only the user with the private key associated with the public address where the crypto was assigned has the power and right to spend the crypto.
  • Crypto exchanges and other platforms utilize this concept to enable the trading of cryptocurrencies. When a person sends messages through their wallet, they sign the message using their private key.

Blockchain Wallet Fees

Using a blockchain wallet has many benefits. It’s important to remember that transactions with it aren’t free. These transactions, whether between wallets or involving local currency conversion to cryptocurrency, incur fees. Blockchain wallet fees are the charges for using the wallet for various operations, such as transferring cryptocurrency between users or converting it back to local currency. These fees are usually dynamic and vary depending on the transaction size and type. Blockchain wallets usually come with two fees:

  • Exchange fees: These are charged for buying or selling cryptocurrencies on an exchange platform. They usually range from 0 to 1.5% per trade, depending on whether you are the buyer or the seller.
  • Network fees: These fees vary based on the used blockchain platform. They are charged to compensate the network nodes that process and verify transactions on the blockchain network.

As a crypto user, there are two fee options available when using a blockchain wallet, and these are the priority and regular fees. The priority fee is more expensive but can ensure the transaction will be processed within an hour. On the other hand, the regular fee is cheaper but may take longer than an hour to process. Additionally, users can customize their fees according to their preferences.

Why Use a Blockchain Wallet?

As cryptocurrencies are based on a public digital ledger and are accessed via the internet, cybersecurity should be a major concern for those who intend to use and store them for an extended period of time. Therefore, creating a blockchain wallet should be a top priority for investors.

What are Public and Private Keys?

Cryptocurrency wallets typically start with a private key, a random string of numbers and letters. These private keys can also be a QR code or a mnemonic phrase. The private key generates a public key through an encryption process. Although it is easy to check if a specific private and public key is a pair, it’s impossible to derive a private key from its corresponding public key.

This one-way encryption ensures that sharing a public key does not put your crypto at risk of being stolen. The public key is then compressed into a receiving address, either a QR code or a shorter string of numbers and letters that you can use to receive crypto. You can generate multiple public keys from one private key, each with its own receiving address. As a user you usually don’t interact directly with these digital keys; they are stored in wallet files or managed by crypto wallet apps.

Blockchain Wallet Features

Now that you have an understanding of how blockchain wallets work, it’s important to know about their key features. Here are some of the significant features of blockchain wallets:

  • User-friendly: These wallets are designed to be easy to use, similar to other software or wallets used for daily transactions.
  • Highly secure: Security is crucial, and with blockchain wallets, it’s all about securing your private key.
  • Facilitates instant global transactions: transactions are fast, free of barriers, and don’t require intermediaries.
  • Low transaction fees: The cost of transferring funds is much lower than at traditional banks.
  • Supports multiple cryptocurrencies: This feature allows for seamless currency conversions, making managing different digital assets in one place easy.

Differences Between Wallet and Blockchain

Blockchain

Wallet

A blockchain keeps track of every transaction record across the network.

A wallet identifies and records transactions involving certain addresses or private and public keys.

A blockchain uses the same system, similar to the network’s monetary system.

A wallet acts like a bank account for users.

You cannot store keys on a blockchain.

A wallet holds the private keys required to unlock the cryptocurrency linked to a certain wallet address.

A blockchain consists of cryptographically linked pieces of data.

A wallet contains cryptographically coupled private and public keys.

Different Types of Blockchain Wallets

Hot Storage

When discussing “hot storage,” we mean the storage device is connected to the internet. Hot storage is easy to access and perfect for everyday use because it lets you quickly access your funds. However, there are some drawbacks to hot storage. The most significant disadvantage is that it is more vulnerable to hacking and cybercrime. You can no longer access your coins if you lose your private key. Similarly, your coins will be lost if someone steals your private key. Online (cloud), desktop, and mobile wallets are the most common hot storage wallets.

  • Online (cloud) wallets: These are extremely convenient but are the least secure form of wallets. They are used to store private keys and transaction records on a third-party server, which makes them susceptible to hacking. As a result, it is recommended to use online wallets for storing small amounts of money that will be used for short-term storage, such as daily transactions in exchange services.
  • Desktop wallets: These are downloaded and installed on a single computer. They provide better security than online wallets, as the funds related to an account can only be accessed through that specific device. This provides a good balance between security and convenience. However, desktop wallets can also be vulnerable to hacking if the computer is compromised. Keeping the computer secure and regularly updating the wallet software is recommended to prevent security risks.
  • Mobile wallets: These are similar to desktop wallets in that they provide better security than online wallets. However, they are more convenient because they can be accessed by installing an app on a mobile phone, which is smaller and simpler than desktop wallets. Although they are more accessible, they have the same drawback as desktop wallets seeing that they become inaccessible if the phone is damaged.

Cold Storage

Cold storage, also known as offline storage, refers to storage not connected to the internet. It is more secure than hot storage and is useful for long-term storage. However, this increased security comes at the cost of convenience, making it unsuitable for daily transactions. Although highly secure, it is still vulnerable to physical damage or loss. There are two types of cold storage wallets: hardware and paper.

  • Hardware wallets: These wallets store your coins/funds on a physical device. Unlike hot wallets, private keys are stored offline, providing higher security. However, transactions with hardware wallets require an internet connection to execute them. It is much safer than hot wallets because the physical device is not connected to the Internet, making it difficult for hackers to access. However, it is essential to purchase hardware wallets from a trusted company because the company can lose your private keys and compromise their users accounts. Additionally, you should not use second-hand hardware wallets to ensure maximum security.
  • Paper wallets: These are considered the most secure wallets since private keys are printed on paper and stored in a secure location known only to trusted individuals. They offer robust protection against hacking and malware. However, they do have some limitations. Paper can deteriorate over time, and the ink on the paper may run if it gets wet or is exposed to high temperatures. As a result, users need to ensure they store their paper wallets properly to avoid damage.

Multi-Signature Wallet

Multi-Signature Wallets require multiple private keys to authorize a transaction. The number of keys needed depends on the wallet’s initial setup, such as using 2-of-3 or 3-of-5 keys. There are two main benefits to using multi-signature wallets

  • Firstly, it provides a higher level of security by preventing a single point of failure. For example, in a 2-of-3 configuration, the hacker still can’t make unauthorized transactions even if one key is compromised. They would need to hack multiple accounts simultaneously to gain access. 
  • Secondly, it also offers decentralization, allowing multiple people to hold private keys and work together to make decisions democratically. For instance, in an organization with five board members, each holding a private key, three keys would be needed to perform a transaction. This approach ensures that no one person has absolute control over the funds. Decisions can be made collectively for the organization’s benefit, even if one member leaves.

Multi-Currency Wallet

Multi-Currency Wallets are a type of wallet that can store different types of cryptocurrencies at the same time. They are a convenient option for those who want to use and manage multiple cryptocurrencies without switching between wallets. With a multi-currency wallet, you can easily perform transactions involving various cryptocurrencies, such as Bitcoin and Ethereum.

In addition, some multi-currency wallets may integrate with ShapeShift, allowing you to convert one type of cryptocurrency to another without leaving your wallet. This feature can save you time and money by eliminating the need to go through an exchange.

Deterministic Wallets

Mnemonic wallets, also known as seed wallets, are those types of wallets that generate related private keys from a 24-word recovery phrase. The recovery seed serves as a backup for the wallet and can be used to restore all the private keys. Most modern wallets are deterministic, using a single hash function to generate all the private keys.

Hierarchical deterministic (HD) wallets are a type of deterministic wallet with sub-wallets with child and grandchild relationships. To enable this type of wallet structure, HD wallets use the BIP-32 format. These wallets are useful for companies that want to allocate keys to different departments or branches to track expenses.

Non-Deterministic Wallets

Non-deterministic wallets are those in which the private keys generated on the wallet are independent and unrelated. Each private key is unique and cannot be recovered using a common recovery phrase or seed. If a user generates multiple private keys, each key must be backed up separately, creating difficulties for management when dealing with many keys.

How to Choose a Blockchain Wallet

The choice of a wallet largely depends on your preferences and usage needs. There is always a tradeoff between convenience and security when choosing a wallet.  A hot wallet would be more convenient if you need to use your funds frequently for day-to-day transactions. At the same time, a cold wallet would be more suitable for storing funds for an extended period.

When selecting a blockchain wallet, choosing one that allows you to control your private keys and store them locally or offline is advisable. It’s also a good thing to choose a blockchain wallet that’s compatible with multiple operating systems, comes with a backup seed phrase, and has security features such as passwords to safeguard your funds.

How to Create a Blockchain Wallet

With the increase in cryptocurrency market awareness, you may be interested in creating your own blockchain wallet. Understanding how a cryptocurrency wallet operates internally can be beneficial before beginning the process. Here are the steps to creating your own wallet: 

  • Learn the basics: Before diving into building a blockchain wallet, it’s important to understand the fundamentals of blockchain technology and cryptocurrency. You can find plenty of guides online that can help you get started.
  • Use open source libraries: Many cryptocurrencies are open, so you can utilize resources like the BitcoinJ SDK or Coinbase SDK to create a wallet for Android and iOS platforms.
  • Use APIs: You can leverage distributed ledger APIs like Bitcore, Factom, and Coinbase to develop a feature-rich blockchain wallet. This can save time and streamline the development process.
  • Consider the cloud: If you want to create a web-based wallet, consider using platform-as-a-service (PaaS) systems. For app development, you can explore blockchain-as-a-service (BaaS) options offered by companies like Microsoft, Amazon, and Azure.
  • Choose the right technology: Decide on the technology stack that suits the type of wallet you want to create.
  • Prioritize security: A cryptocurrency wallet must be secure. Ensure to incorporate multi-factor authentication, implement continuous security updates, and respond promptly to bugs.
  • Research and start building: Look into existing popular blockchain wallets to identify what’s missing and what works. Then, start building your blockchain wallet.

Benefits of Blockchain Wallets

  • Conduct transactions across borders with ease and without the need for foreign exchange conversions or extra fees.
  • No intermediaries are involved in transactions.
  • Low transaction costs, especially for those conducting large transactions.
  • Better security and privacy due to the use of cryptography.
  • Faster transactions compared to traditional banking methods.
  • Accumulating benefits from using cryptocurrencies.
  • Simple sign-up process compared to acquiring a traditional bank account, which often requires complicated procedures and verification.
  • Easy to manage and create with low barriers to entry.

Challenges of Using Blockchain Wallets

  • Limited adoption and usage globally.
  • Limited support for outdated technology and network accessibility.
  • Cryptocurrencies can be highly volatile in terms of value.
  • Limited device availability among individuals with limited access to banking services or who are unbanked.

Tips on Using a Blockchain Wallet

  • Choose a blockchain wallet that gives you control over your private keys and allows you to store them on your local device or offline for added security.
  • Choose a wallet with a backup seed phrase that offers additional security features such as password protection.
  • Choose a wallet with an active development community that provides regular maintenance and improvements.
  • Choose a user-friendly wallet that is easy to navigate and operate.
  • Look for a wallet compatible with your operating system and, if possible, with multiple systems for added convenience.
  • Opt for an HD wallet that automatically generates addresses without an excessive backup for each private key.
  • Consider a wallet that does not require verification of KYC (know your customer).
  • Choose a wallet that meets your needs, such as day trading, holding, long-term and short-term savings, or other purposes.

Blockchain Wallet Security

Ensuring a wallet’s security is crucial, as it safeguards user assets from potential attackers, including the wallet provider itself. Blockchain Wallet prioritizes wallet security by employing several levels of protection.

Mnemonic Seeds

Blockchain Wallet uses mnemonic seeds, a set of random English words that function like passwords. These seeds help to recover lost wallets, and the company does not store them, ensuring user privacy. Moreover, these seeds comply with industry standards, meaning they can be used to restore wallets, even if the company goes out of business.

Optional Security Methods

Besides standard security measures, Blockchain Wallet offers optional features to increase wallet security. These features include two-factor authentication, IP whitelists to block unfamiliar devices, and the option to block access via the Tor network. These optional methods reduce the risk of phishing attacks and prevent potential hackers from disguising their IP addresses.

Passwords

As with other digital services, Blockchain Wallet requires user passwords to protect their accounts. The company does not store user passwords, nor can they reset them if lost, to prevent internal theft.

Final Thoughts on Blockchain Wallets and How They Work

A blockchain wallet is a gateway to cryptocurrency and blockchain technology. It is important to safeguard your key and choose a reliable one. Regardless of the type of wallet you choose, it serves the same purposes: to receive funds from others, check your balance, and send funds to others. You can explore the fascinating world of blockchain-based financial transactions with a cryptocurrency wallet.

Frequently Asked Questions

Do I Need a Blockchain Wallet?
A blockchain wallet is the safest way to store your digital assets. While you could keep them in an online brokerage like Coinbase, the wallet can only be accessed by a unique key that can't be replicated once it's generated.
How Do You Get a Blockchain Wallet?
Creating an e-wallet with Blockchain Wallet is free, and the account setup process is done online. You will need to provide an email address and password that will be used to manage the account. The system will send an automated email requesting that you verify your account.
What is the Difference Between a Blockchain and a Wallet?
The main technical difference between your DeFi Wallet and your Blockchain.com Account is that the DeFi Wallet is non-custodial, while the Blockchain.com Account is custodial. This means that Blockchain.com does not hold the balances for you.
Can my Blockchain Wallet be Traced?
Yes, Bitcoin transactions are traceable because the ledgers are open to the public, and anyone can access them. Bitcoin explorer tools can trace any activity on the blockchain, including the amount sent and the addresses involved in a transaction.
Can Someone Hack my Blockchain Wallet?
Blockchain technology has many built-in security features that make it difficult for hackers to corrupt it. While a cryptocurrency hacker can take over a blockchain, they can likely steal tokens from sources such as a wallet or a cryptocurrency exchange.
What is a Blockchain Wallet?

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What is a Blockchain Wallet?

By Ehis Ohiwerei - min read
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