Debunking Mysteries About Digital Assets (Series 1 of 7)

Ledger Nano Hardware wallet

Digital Assets Wallets

A digital asset wallet works in the same way as a cash, credit cards and other physical assets wallet. The only difference is that it is a software program-a smart wallet which has its own security features. These wallets can be made to store only one asset class or different assets. The digital wallet interacts with the blockchain and allows sending and receiving of assets. Before you can own any digital asset you would require a wallet which enables you to get a unique address which acts like an account- to receive digital assets. You can only send an asset to a wallet address which can support that asset class, sending to a non-supported class can result in total loss of the asset.

How does a wallet work

A wallet contains a public key and a private key and when a person sends an asset such as bitcoin or ethereum or VFC, they are essentially signing off ownership of the coins they are sending to your wallet address. If the private key and the public key match, the balance gets updated in the incoming wallet and increases whilst in the sender’s outgoing wallet the balance reduces. There is no exchange of real coins- it all happens through a transaction getting recorded on the blockchain to confirm the transfer.

Visual illustration of matching wallet keys

Private Key

The private key (referred in other terms as the seed) is an integral component of the wallet and it is a number (integer). Wallet software often attempts to shield the need to understand what the private keys are and how they work, however, most users eventually encounter private keys too often with unpleasant results. An understanding of private keys is essential in preventing loss of assets. A private key is used together with the public key to create an unforgettable message signature. The private key must be kept secret. Public and private keys are mathematically linked through a signature algorithm, a mathematical procedure used for creating identities, signing messages, and validating signatures. Anyone who steals the private key can steal the funds/assets.

Public Key

A public key is generated through a mathematical transformation of the private key. The public key identifies a sender or recipient and this is used to generate the wallet address which can be distributed to others.

Types of wallets

Now that we have a brief idea of the keys, we can explore the different types of wallets. Wallets can exist in different forms and this could be a desktop wallet, online wallet, mobile wallet or a hardware wallet.

  • Desktop wallet– downloaded and installed on a PC or laptop and normally come free of charge
  • Mobile wallet– can run as an app on a smartphone and can be useful for making transactions (peer-to-peer and monitoring assets on the go. Most of the wallets are available free of charge.
  • Hardware wallet- these differ in the way the private key is stored –private keys are normally stored on the hardware device like a USB stick. Hardware wallets make transfers online, however the assets are stored offline (cold storage) and you would have to connect to a computer using several web interfaces which may be available. The Nano S is an example of a popular hardware wallet. Hardware wallets are still quite expensive and for the Nano wallet you would be looking at around 100USD. However, for someone trading assets which carry a high value this can be a worthy investment for peace of mind.
  • Paper Wallet-paper wallets are easy to use and provide a very high level of security. The term simply refers to a printout of your public key and private key but can also refer to a piece of software used to securely generate a pair of keys which are then printed. If you lose the printed paper it means you cannot recover your assets.

Security of Wallets

Wallets have varying levels of security depending on the type. A web based wallet is riskier as this can be susceptible to hacking. Offline wallets are relatively more secure as once offline, they become less vulnerable to hacking. No matter which wallet is used, losing private keys can lead to loss of funds.

Hope everyone finds the information useful and our next series will be open to suggestions on what to cover. Remember to follow this blog to get alerts for new posts.

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