Digital asset storage is important for anyone looking to grow their crypto portfolio and keep their assets safe. But before you make your first investment, you should know how to store cryptocurrencies. The process may seem straightforward: you get a software wallet and buy a crypto of your choice. There are, however, many factors that come into play to keep your assets safe and secure. In this guide, we’ll dive into how various types of digital wallets work and their associated uses.
Web3 Wallets
With web3 wallets, funds are stored on the blockchain, tied to a private key that grants you access to your assets. You control the private key, which means no one can access or transfer assets without your permission.
Unlike traditional centralized wallets, on-chain storage grants users greater control over funds, privacy, and security. You also get access to great tools and platforms –like DeFi and other useful dApps– but a web3 wallet sometimes presents a steep learning curve for new users. Web3 wallet users must regularly approve blockchain transactions to buy and distribute assets.
Additionally, users must ensure they are only connected to trusted sites and apps to avoid fund-draining hacks. But if you can overlook the initial technical difficulties you’ll encounter, storing funds on-chain is an efficient way to self-custody assets and promote the decentralization of web3.
Types of web3 Wallets
All web3 wallets are primarily browser-based but can be modified and used differently, depending on your risk appetite. Browser-based wallets are browser extensions that run on a web browser. They usually have accompanying mobile apps as well.
Web3 wallets are used in two different ways, including:
- Hot wallets
- Cold wallets
Hot Wallet
Web3 wallets used without a hardware wallet are considered “hot.” For example, if you’ve created a MetaMask or Phantom Wallet without a connected ledger, the wallet is considered hot –unsecured.
With hot wallets, the platforms you’ve granted access to your wallet can withdraw funds–at any time. The majority of hot wallet users are new traders. People also establish hot wallets for fast transacting when not storing funds in a cold/hardware wallet.
Cold Wallet – Hardware Wallet (Ledger)
A cold wallet is a Web3 wallet secured by a hardware wallet, such as a Ledger or Trezor. Hardware wallets store private keys offline, so you can only make transactions when the physical hardware wallet connects to your computer. You can use the ledger directly for cold offline storage or link it to your Web3 wallet to access dApps.
Web3 Wallet providers
As previously mentioned, most browser-based wallets are made specifically for one or more blockchains. For instance, EVM wallets will store funds on EVM-compatible blockchains only. Let’s take a look at wallet providers for each type of blockchain:
EVM-compatible Wallets
EVM-compatible wallets support the Ethereum blockchain and other EVM-compatible blockchains like BNB smart chain, Fantom, and others. Some popular EVM wallets include:
Solana SPL compatible Wallets
SPL, the Solana Platform Token, is the native cryptocurrency of the Solana blockchain. Here are a few examples of Solana SPL-compatible wallets that allow users to store, send, and receive funds on Solana:
Aptos Wallets
Aptos is one of the most recent L1 blockchains to hit the market. Here are a few wallets for Aptos users:
Crypto Wallets
Crypto wallets are digital wallets you can use to store, manage, and transfer cryptocurrencies on-chain –although they can’t natively connect to dApps like web3 wallets.
WalletConnect
WalletConnect is an open-source protocol that allows web3 users to securely connect their crypto wallets to desktop and mobile dApps –essentially making them Web3 wallets. There’s no need to type in seed phrases or private keys or switch between multiple wallets and apps. Users can initiate transactions, sign messages, and access other wallet functionalities from within the dApp using WalletConnect. Walletconnect has integrations with some of the most popular crypto wallets, such as Trust wallet, Safe wallet, and Zelcore.
Web3 Wallets vs. Crypto Wallets
While “crypto wallet” is often used interchangeably with “web3 wallet,” the two aren’t necessarily the same. As previously mentioned, a crypto wallet only has the capability to hold cryptocurrencies. A web3 wallet is a crypto wallet, but it also supports a wider range of digital assets and capabilities, including housing NFTs and interacting with dApps.
Similarities:
- Both web3 and crypto wallets are meant to store digital assets. Users can send, receive and store their assets with little to no restrictions.
- There are both custodial and noncustodial options.
- Easy-to-use interface.
Differences:
- Web3 wallets often interact with blockchains and dApps, while crypto wallets are strictly for crypto assets.
- Web3 wallets typically have more advanced features and functionality.
- Crypto wallets don’t require a deeper understanding of blockchain technology.
Hybrid Wallets (CEX Wallets)
Hybrid wallets combine features of both centralized and decentralized wallets. These wallets enable users to interact with dApps and access various blockchain networks –all from a CEX wallet.
Coinbase’s CEX wallet, for example, is a non-custodial wallet that allows you to store your crypto and interact with dApps on Ethereum. The CEX wallet also offers a built-in DEX powered by the 0x protocol.
In essence, hybrid wallets offer a balance between the convenience of a centralized wallet and the functionality of a decentralized wallet.
Web3 Wallets vs. CEXes
While a web3 wallet offers on-chain storage, a Centralized Exchange (CEX) is a centralized platform that allows users to trade and store cryptocurrencies. CEXes such as Binance, Coinbase, and Kraken typically hold the users’ private keys directly on their servers, which gives them access to the funds. While it may seem convenient to some users, others find entrusting their funds to a third party unsettling. If the exchange gets hacked or is insolvent, the funds may be at risk.
Web3 wallets, such as MetaMask, or Trust Wallet, on the other hand, give control to the user. As mentioned earlier, the private keys are stored directly on the blockchain. However, this means that users are responsible for the safekeeping of their private keys.
Multi-Signature Wallets
Multi-signature Wallets are software wallets that allow multiple users with web3 or crypto wallets to collectively store funds. The wallet requires multiple “signatures” or members with wallets to make transactions which decreases the attack vector. To become a member of a multi-signature wallet, you must own a Web3 wallet or a crypto wallet capable of connecting to dApps via WalletConnect. Existing members can vote you in and adjust the voting threshold accordingly.
Streamflow offers a secure multi-signature wallet capable of token vesting and payroll payment streams. Users can set a threshold and vote on member proposals to distribute funds with flexible scheduling.
Self-custody
Among all wallet options, the only option where you do not have full custody over your funds is the CEX wallet. Understanding who holds your crypto and the potential risks is paramount. Here are the advantages and disadvantages of having self-custody over your funds:
Advantages:
- Security: Users can store their private keys on their own devices –reducing the risk of stolen funds.
- Control: By storing their private keys on their device, users have complete control over their funds and can access them –at any time.
- Independence & Privacy: Users are granted autonomy without the policies and restrictions of a third party.
Disadvantages:
- Complexity: To use a self-custody wallet effectively, especially if you’re new to crypto and DeFi, you must have a basic understanding of cryptography, private keys, and the inner workings of cryptocurrencies.
- Responsibility: Users are fully responsible for securing their private keys and funds.
- Risk: If a user loses access to their private keys, they will not be able to access their funds, and there is no way to recover them.
Conclusion
As the world becomes increasingly digital, cryptocurrency storage will become more critical. However, investing in cryptocurrencies also requires extra measures to ensure the security and safety of your digital assets. Whether you choose a hardware, Web3, or CEX wallet, it is essential to carefully consider your options and take necessary precautions to protect your investments.
To learn more, visit Streamflow.finance/multisig