Cryptocurrency wallets explained
Wallets available for crypto have varying characteristics in terms of security and ease of use. It's extremely hard to balance those two because the most secure wallet is a wallet that nobody, even you, can access. And the most easy to use wallet is a wallet that anybody can access. Obviously, none of these extremes make sense, hence there is a wide range of wallets somewhere on this spectrum of easy vs secure. In this blogpost we'll go over available wallet types.
Cryptocurrency Exchanges
Examples
When you store your crypto on an exchange you don't actually own it. The exchange owns it, and what you have is a receipt that says that the exchange promises to return your crypto to an address that you specify upon your request. The caveat is that if the exchange becomes insolvent, like it happened to MtGox, they will not be able to return your funds. Also, exchanges are central hubs containing a small fortune in crypto, and as such they attract both hackers and the government. For example, poloniex recently refused to return crypto to Russian citizens impacted by the so-called Magnitsky act.
This is arguably the easiest option to use though, and the most liquid when it comes to fiat ⇄ crypto exchange.
Ease of use: ★★★★★
Security: ★
Desktop wallets
Examples
Every crypto that has its own blockchain needs to make two pieces of software: the mining program and a desktop wallet. If you use such wallet you are the owner of your coins, so it's much more secure than an exchange. The programs typically ask you to use a password to encrypt your wallet, so the security of your coins is determined by:
- How secure your operating system is
- How strong your password is
- Whether the program that you're running is original, not hacked version
Typically, as long as you're careful where you download things from, have an antivirus and latest security system updates installed, and use a reasonably strong password you should be good to go. At this point, unless you're storing billions of dollars, it will be too expensive for someone to hack you (the same level of hack could be used to hack more lucrative targets such as businesses or ultra high net worth individuals). Just make sure you don't download software from untrusted sources.
Desktop wallets also offer to use a hardware wallet (described below) instead of a password, further enhancing security.
One caveat is when it comes to full blockchain wallets you have to download the whole blockchain which can take a considerable amount of time. Consider using a lite wallet like Electrum (which is available for more than just bitcoin, there exist forks for litecoin, dash, bitcoin cash, dogecoin, verge and a number of others).
Ease of use: ★★★
Security: ★★★
Web wallets
Examples
Similar idea to the desktop wallets, but instead of downloading software to run on your computer you run it in your web browser (which itself is like a mini operating system). This is slightly less secure than web wallets since
- You now also rely on your browser being secure
- With desktop software it's download once, use any time; with web wallet you're essentially downloading it every time, which makes it a lucrative target for hackers. If someone hacks myetherwallet website for, say, 30 minutes, during those 30 minutes the hackers can steal coins from every user that was unfortunate to visit the website at that time.
It is a bit easier to use than the desktop wallet, but is a bit less secure.
Ease of use: ★★★★
Security: ★★
Multicurrency wallets
Examples
Undeniably beautiful and convenient, under the hood these wallets hide a lot of complexity and can be implemented in both a secure and unsecure way.
These wallets are also not open-source, but are in fact young businesses that are still figuring out their business model. So if the founders decide to stop working on the wallets and don't provide the necessary security updates, or if they have bugs in code that they are not aware of, you may end up losing your money.
If you are comfortable with the associated risks these wallets provide you with the best user experience and truly feel like the money of 21st century.
Ease of use: ★★★★★
Security: ★★
Cold storage
Examples
This is the most secure way of storing cryptocurrencies (sadly available only for some blockchains), since the computer that actually stores the coins never goes online, so hackers would need physical access to this machine. It's fairly popular to use a raspberry pi, a $50 tiny computer, to act as cold wallet storage. You typically need to follow fairly complex guides, sending coins becomes a pretty hard process (kind of like a bank's wire transfer in terms of how much time and effort it takes), and sometimes requires some technical knowledge of the blockchain protocol and linux. However, the security is unprecedented. You could, theoretically, create an Electrum multisignature wallet, where you use one computer as an internet gateway, and up to seven raspberry pi's for security. After you've created such wallet, you can then put the raspberry pi's in bank vaults of different banks in different countries if you want to go full paranoid.
You can then easily generate addresses from your internet machine and accept cryptocurrency payments at any time. When you want to send money though you would need physical access to all of the wallets (not necessarily at the same time) in order to sign the transaction and broadcast it to the network.
This is an extreme, but this is how I would store a billion dollars. If he who shall not be named chose this method to preserve his life, it should be good enough for us mere mortals to store our money.
Ease of use: ★
Security: ★★★★★
Hardware wallets
Examples
These are essentially tiny computers that act kind of like cold storage. They typically look like a USB stick, and the most popular ones are Trezor and Ledger Nano S. This is kind of like having a digital key, just like you have a physical key to your apartment. If someone steals your key - they can steal your TV. If someone steals your ledger nano s - they can steal your coins. And if you lose the physical hardware wallet it's the same as losing your normal wallet for fiat - say goodbye to your cash.
However, if you are confident that you will not lose your hardware wallet, using one instead of a password with a desktop wallet such as Electrum is more secure.
Ease of use: ★★
Security: ★★★★
Paper wallets
Examples
Similar to hardware wallet that stores your private key on a microchip, you can also generate a key and a receiving address on a piece of paper, laminate it to protect from water, and put it in a bank vault. This wallet is for receiving coins only. If you want to send coins from it, you'd have to convert a paper wallet into a desktop wallet by sweeping the paper wallet. There are plenty of instructions online.
This is a great method for long-term cryptocurrency storage.
Ease of use: ★★★★
Security: ★★★★★
Summary
If you want to store considerable funds in cryptocurrencies, I would go with a cold storage system (raspberry pi or paper wallet) for long-term holding, kind of like a bank's savings account, and store some amount of coins for daily use on a desktop wallet, secured by a hardware wallet instead of a password.
For trading and exchanging, I would use changelly or shapeshift in order to convert between coins, localbitcoins.com for bitcoin ⇄ fiat exchange. You should only keep crypto on an exchange such as coinbase or poloniex if you participate in active day trading and need fast liquidity, but only if you fully understand the associated risks.
Let us know if this material is helpful or if you have any other questions. If you find it useful we will write more blog posts about cryptocurrency basics to educate the community, which is the ultimate goal of Rados project.
By the way, did you have any troubles using litecoin to purchase STN tokens on rados.io?
Happy Bitcoin Segwit day!
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