Core Concept

Core Concept: Wallets

While digital wallets have notionally been around for a number of years, blockchains and cryptocurrency bring wallets to a whole different level.


Some have referred to web3 technologies as read-write-own, versus web2 technologies which were just read-write. Blockchain-based wallets are what enables that ownership, since the cryptocurrency coins and tokens you own, if you hold them in your own wallet, are literally in your wallet. They aren’t stored as a number in a database somewhere that could be changed or taken away in a moment's notice, but rather on a secure piece of software or hardware that requires your digital signature in order to perform any transaction.

Here are a few of underlying components of wallets that are good to understand:

Public & Private Keys

The public and private key provide access to a wallet (account) on a blockchain. The public key is your receive address, which anyone and everyone can see, and is what would be provided to other parties so they can send funds. The public key is like read only access for an account.

The private key is what you use to sign (approve) transactions for a wallet, and without the private key you cannot access your funds at all. The private key is like having admin access.

This is a significantly different model than how we normally access and control our money, and is a key area where those that are new to cryptocurrency can make mistakes. Losing a private key, or having it compromised, means someone could take all of your funds with no further recourse. So it’s critically important that keys are protected.

Hot vs Warm vs Cold

There are a couple of ways wallets can be configured which change how they are used and how they are protected. Hot vs cold is more of a sliding scale than a toggle switch, where the ‘temperature’ of the wallet indicates the permissions or accessibility surrounding the keys.

On one end of the spectrum, an example of hot wallets would be browser based wallets with limited password protection; access to the wallet is open and transactions can easily be signed. On the other end of the spectrum, a cold wallet would have an air gapped hardware device; access to the wallet is limited to physical access plus performing a required protected sequence to sign transactions.

In the middle of these two extremes is the growing concept of warm wallets, which are not air-gapped like cold wallets, but they do have significant levels of additional security layered on. Usually this includes some type of multi-key or multi-signature cryptography, so that there is more than one key, often stored in more than one location. It also usually means levels of policy and approval workflows, in order to protect large or anomalous transactions.

Custodial vs Non-Custodial

A custodial wallet is one where the owner of the assets in the wallet and the holder of the wallet’s private keys are different entities. Users or organizations who are not comfortable managing their own wallets directly may want to leverage a custodial wallet, so they can still easily store their cryptocurrency, but they defer all of the risk and security to a third party.

It should be noted that there is a distinction between regulated and non-regulated custodians; regulated custodians offer greater assurance towards the quality of vendors, and usually operate in accordance with specific regulations or guidelines associated with the country they operate in, but this isn’t always necessary.

A non-custodial wallet is one where the owner of assets is in control of the wallet’s private keys. These are sometimes referred to as self-custody wallets, though there are large scale custodial wallets that are used for both individuals and institutions which are considered non-custodial, but are better described by the growing area of warm wallets.

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