What wallets and keys are
Lesson 4 of 39 in the course “Crypto”. Free, with animations and a quiz.
First: what a blockchain is
A blockchain is a shared record of all transfers, with copies kept by many computers around the world. Your coins are an entry in that record under your address. An address is like an account number: you can safely give it to others. But only whoever holds the private key can move the coins at that address. This lesson is about that key and where to keep it.
A wallet holds keys, not coins
A private key is a long secret code you use to sign transfers, which proves to the network that the coins are yours. A wallet is an app or device that stores this key. The coins themselves always live on the blockchain. Hence the line in the picture: "Not your keys, not your coins". If someone else holds the keys, the coins are not really yours.
Custodial vs non-custodial
Custodial wallet: a company, such as an exchange, holds the keys. Convenient, but if the exchange is hacked or freezes withdrawals, you depend on it. Non-custodial, meaning your own wallet: only you hold the keys. Nobody can block your access, but nobody can help if you lose the key either. Not a bug, a feature: freedom comes with responsibility.
Hot and cold
A hot wallet is connected to the internet: a phone app or a browser extension. Handy for frequent use, but easier for hackers to reach. A cold wallet keeps keys offline, most often a hardware wallet, a small device like a USB stick. The split in the picture is a rule of thumb, not a law: about 10% hot for everyday moves, about 90% cold.
Check yourself
- What does a wallet really store?
Correct answer: The private keys to your coins. Coins are always recorded on the blockchain. The wallet stores the key that lets you move them. - Your coins sit on an exchange. Who holds the keys?
Correct answer: The exchange, it holds them for you. That is custodial storage: the company holds the keys, and your access depends on it. - Which wallet is safer for large sums?
Correct answer: Cold, the keys stay offline. A cold wallet keeps keys away from the internet, so stealing them remotely is much harder.