What are Blockchain Wallets and How do they Work?

Mar 7, 2018 3:01:52 PM


Cryptocurrencies are causing a stir with their skyrocketing value. With this, the demand for Blockchain wallets is rising as well. By the end of 2017, over 21 million users were reported to be using the wallets for transactions of their digital currencies (according to Statista).

While these wallets are wrapped in an intuitive interface for users, they have a complex functioning at the backend. This makes many curious about how exactly these Blockchain powered wallets work, how secure are the transactions made with these wallets, how and where do they store digital currencies, and so on. The following segment share insights about Blockchain wallets and its related aspects (types, security, development etc). 

What are Blockchain Wallets?

A Blockchain (or cryptocurrency) wallet is a software program that enable users to buy, sell, and monitor balance for their digital currency (or assets). If you are involved in exchange of Bitcoin, Ethereum, or other cryptocurrencies, then you must be using a Blockchain wallet of any type (different wallet types discussed later).

Unlike traditional pocket wallets, Blockchain wallets do not save cryptocurrencies. They keep a record of all transactions (sell, buy, exchange) related to the currency and store them on Blockchain.

How Blockchain Wallets Work?

A cryptocurrency wallet store private and public keys for a transaction. The wallet interacts with multiple Blockchains to validate a transaction, enabling users to purchase or sell one or multiple cryptocurrencies. But, what exactly happens in the background that makes a safe, cryptocurrency transaction possible? Let’s understand it with an example.

  • Before we move on to how cryptocurrency wallets work, let’s understand the concept of public and private keys that are stored on Blockchain for a transaction. These keys are non-identical pairs of large numbers, wherein, one key can be shared with anyone (public key) and another is kept secret (private key).

    These keys work very similar to the lock-and-key concept- your lock (private key) and keys (public key). No matter how many people have the keys, they can only be of use, if it is used to open the right lock, i.e. the private key is rightly paired with the public key.
  • Once you unlock the locker, you can see what’s stored in it. Similarly, when the public and private keys used in a transaction matches, users can see value of their digital assets (Bitcoins, ICO tokens etc.) in their wallet.

Example: Say, someone sends you a Bitcoin or any other digital currency. When doing this, the sender is assigning you the ownership of that currency to the address of your Blockchain wallet. Now, for you to be able to spend those coins, the private key in your wallet must match the public key that the currency is assigned to. When both the keys match, your wallet balance will increase. In this process, there is no exchange of currency but a transaction is committed, recorded on Blockchain, and the changes are then reflected in the wallet.

Types of Blockchain Wallets:

There are three types of cryptocurrency wallets available to store and reflect a transaction on Blockchain.

1. Software Wallets:

These are software applications that are downloaded on a device (either desktop or mobile) or accessed online. Depending upon the type of device they are meant for, software wallets are further categorized as:

Desktop: They wallets can be downloaded on a PC or a laptop and can only be accessible from the system they are installed on. If anywhere access is not something that you’re expecting, then software wallets are good to go.

Limit: Desktop wallets are though a safe choice, but ascertain that your system is protected against virus attacks (as a single vulnerability may make you lose your funds).

Online: Since these wallets run on cloud, you have the advantage of accessing them to any device (mobile, tablet, desktop) through a web browser.

Limit: The private keys for a transaction (in online wallets) are saved online and are controlled by third party, which makes them a little unsafe option to go for.

Mobile: These wallets are available as a mobile app and therefore are available with anytime, anywhere access. Along with this, the ability to scan QR codes enable easier and faster funds transfer. Considering the benefits that mobile apps offer, mobile wallet development is popular amongst the three software wallet categories.

While there is no such system that’s 100% secure. All that you need is to adopt adequate security measures at your end if you’re choosing any of the three software wallets.  

2. Hardware Wallets:

Hardware wallets store private keys of users on a hardware device (like USB). These wallets have compatibility with various web interfaces and offer support to multiple cryptocurrencies.  To use these wallets, you have to connect them to any internet-enabled device, enter pin, and confirm. Since all currencies are stored offline, hardware wallets are the securest wallet options available.

3. Paper Wallets:

For paper wallets, the pair of keys (public and private) are generated using a software application and are then printed to make a transaction possible. Paper wallets generally work with software wallets for buying and selling of funds.

Currencies are transferred from software wallets to the public address on paper. And to unlock the funds, the currencies are transferred from paper wallet to software wallet. This process is called sweeping, which involves scanning QR code or adding the keys manually.

Single or Multi-Currency Wallet:

The number of cryptocurrencies available over the internet as of 7 January 2018 is over 1384 and growing.’-according to Wikipedia

While Bitcoin still has the biggest Blockchain network, Ripple, Ethereum, Litecoin, Carnado and other altcoins are holding on to the users’ interest. If you or your customers need to deal with multiple currencies for receiving or transferring funds, then there is no need to have separate wallet for every currency. You can either have wallet that supports single currency or the one that supports multiple cryptocurrencies. Having a multi-currency wallet is indeed a better and flexible choice.  

ALSO READ: 7 Myths around Blockchain Technology, Debunked

Blockchain Wallet Development: How to Make the Right Choice?

A Blockchain wallet is meant to simplify cryptocurrency exchange for users (which could be your client or customers). Depending upon how frequent and big transactions are, a choice between software, hardware, and paper wallets can be made.

For example: If your customers frequently buy or sell multiple currencies, then opting for a mobile wallet is the most suitable choice. On the other hand, if your clients are investors (having made an investment in ICO tokens), who will hold the digital currency for longer time, then a hardware wallet meet the requirement. Take some time in assessing these requirements before you move to Blockchain wallet development.

Still have doubt have Blockchain wallets or their development? Talk to our Blockchain expert to know more.

Topics: Blockchain

Archna Oberoi

Written by Archna Oberoi

Content strategist by profession and blogger by passion, Archna is avid about updating herself with the freshest dose of technology and sharing them with the readers. Stay tuned here as she brings some trending stories from the tech-territory of mobile and web.