Be Your Own Bank
In keeping with the principles of financial autonomy and open access, a core foundation of the crypto (and by extension DeFi) space was that users always owned their assets which could only be accessed with the user's consent. Advancements in technology and cryptography has now made it possible for users to achieve organisational levels of security for digital assets which are held on a public blockchain. Without knowledge of a password (i.e. private keys), no party is able to forcefully seize or move a user's funds. Wallets were created as a way for users to securely manage their keys while still making application interactions convenient.
Wallets are essentially applications which enable users to conveniently manage their digital assets. While wallets now come with a myriad of functionalities, the most basic wallets enable users to view their funds, transaction history, and even interact with other applications through signing transactions.
Critically, as your funds and accounts live on the blockchain, wallets are only a convenience tool facilitating fund management. In other words, you can swap wallet providers at any time as long as you have your private keys. Remember that your private keys should never be shared with anyone as knowledge of the private keys gives full access to all your funds on the blockchain.
Wallets generally fall into two overarching categories which are differentiated based upon whether the wallet is air-gapped from the internet:
- Hot Wallet: Wallets which are connected to the internet. Hot wallets store the private keys encrypted on applications which are web-based or installed on desktop/mobile devices. The added risks of having keys possibly exposed on the internet is counterbalanced by the convenience of managing keys and transaction signing. Some examples further categorised by platform are:
- Cold Wallet: Wallets which are kept offline or air-gapped from the internet. Cold wallets can be as basic as a paper wallet where the private key is written on or more complex implementations which takes advantage of hardware security modules. Hardware wallets enable transactions to be signed without the private keys ever being exposed to the internet.
- Hardware Wallet: Ledger, Trezor