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What is Blockchain Wallet?

Last Updated : 20 Sep, 2022
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A blockchain wallet is a software that enables sending and receiving cryptocurrencies such as Bitcoin, Ethereum, etc. It stores the record of transactions and also public and private keys which are used to perform transactions. 

  • A public key is similar to an account number. If A wants to send some money to B using Bitcoin when A sends the public key address to B. Anyone can send BitCoin using the public key. 
  • A private key is similar to an account password. Only the account holder knows the private key. The private key is used to send money.

Public-Private keys are always present in pairs. A traditional wallet stores the currency. While a blockchain wallet never stores any cryptocurrencies. It contains the record of transactions performed by the users. It also stores the public and private keys of the user.

What is Blockchain Wallet?

A blockchain wallet is a cryptocurrency wallet that is used to manage cryptocurrencies like Bitcoin and Ethereum. It helps to exchange funds easily and the transactions are more secure as they are cryptographically signed. The privacy and the identity of users are maintained and it provides all the features that are necessary for secure and safe transfers and exchange of cryptocurrencies. 

Features Of Blockchain Wallet:

  • Secure: Blockchain wallets are secure as they carry on the private key that needs to be secured. There are no cryptocurrencies in blockchain wallets.
  • Easy to Use: Blockchain wallets are easy to use as they are just like any other digital wallets like Paytm that everyone uses in day-to-day life.
  • Low transaction fees: The cost of transferring funds using blockchain wallets is much lower than that of traditional bank transactions.
  • Instant transactions: Blockchain wallets allow users to instantly transfer funds across different geographics and these are barrier-free and without intermediaries.
  • Allows multiple cryptocurrencies: Blockchain wallets allow transactions across multiple cryptocurrencies and thus helping users to do easy currency conversions.

Why Use Blockchain Wallet?

Traditional wallets have many drawbacks due to which blockchain wallets have an edge over traditional wallets. Below are some of the reasons for using blockchain wallets:

  • Transactions are often slow in traditional banking systems and have to pass through an intermediary which means that there is a single central point of failure.
  • There is an issue with keeping track of all the transactions, and accounts, the data can get manipulated or even corrupted across multiple systems.
  • Blockchain wallets reduce all of these problems and hence make the transactions secure and safe for the users.

How Do Blockchain Wallets Work?

The blockchain wallet stores the private keys and public keys for a transaction. The wallet enables users to sell, and purchase goods using cryptocurrencies. Let’s understand how a blockchain wallet actually works and what are private and public keys in a blockchain wallet.

  • When a blockchain wallet is created, a public key is generated, and one can share that public key with anyone in order to receive funds.
  • Private keys as the name suggest is a secret key that cannot be shared with anyone.
  • Public keys on the other hand can be shared with anyone.
  • They have a relationship similar to a lock and a key. Where a lock can be opened with a correct matching key only, similarly in a transaction if a public key matches the private key only then the users can see the value of their assets.
  • No matter how many people have a public key but it will only be useful when it is paired with the right private key.

Let’s understand this with the concept of the email address.

  • To receive an email from someone, the user has to tell his/ her email address but the received email can only be unlocked using the correct password for the account.
  • Public keys are similar to the email address that can be given to anyone, and private keys are similar to the account password, that cannot be shared. The private key should not get hacked, if it happened then there is a possibility that the account is compromised.
  • The private key is used to spend funds.

Types of Blockchain Wallets

The following are the different types of blockchain wallets:

1. Hot Storage: Hot storage refers to the type of storage that is connected to the Internet. Hot storage, being connected to the Internet, allows the user easy and quick access to funds. It is helpful in daily transactions. But, it also has some disadvantages. It is more vulnerable to hacking and cybercrime. If the private key is lost then there is no longer access to coins. Also, if the private key is stolen by someone then it causes to loss of coins. The different types of hot storage wallets are Online(Cloud), Desktop, and Mobile wallets.

  • Online(Cloud) Wallets: These types of wallets are the most convenient but at the same time, least secure. It is used to store private keys and transaction records online (on another server). This makes keys vulnerable to hacking as they are being stored by a third party. Online wallets should be used to store less amount of money that is going to be used for short-term storage i.e. daily transactions in exchange services. Examples: Exchanges like Bittrex or QuadrigaCX, and Online wallets like and GreenAddress.
  • Desktop Wallets: Desktop wallets provide a better level of security than online wallets as they are downloaded and installed on a single computer. The funds related to an account can only be accessed through that device which makes it a bit secure at the cost of convenience. However, it is also vulnerable to hacking if the computer gets compromised. Examples: Exodus, Multibit, Armory, and Bitcoin Core.
  • Mobile Wallets: Mobile wallets are similar to desktop wallets in terms of providing better security than online wallets at the cost of convenience. However, it is a bit easier to use than desktop wallets as they are used by installing an app on a mobile phone which is smaller and simpler than desktop wallets. But, if the phone will damage then it will not be able to access funds, as in desktop wallets. Examples: Jaxx, BreadWallet, Mycelium, and CoPay.

2. Cold Storage: Cold storage refers to the type of storage that is not connected to the Internet. It is also known as offline storage. Cold storage provides a higher level of security than hot storage. It is useful for long-term storage, unlike hot wallets. However, a higher level of security is provided at the cost of convenience. It is not ideal for daily transactions. Although it is secure, it is vulnerable to external damage and loss. The different types of cold storage wallets are hardware wallets and paper wallets.

  • Hardware Wallets: Hardware wallets are used to store coins/funds on a hardware device. The private keys are stored in an offline device, unlike hot wallets, but transactions do require an Internet connection to execute. It provides a higher level of security than hot wallets as they are stored offline in a physical device. However, the problem with these wallets is to trust the company from which buy the devices. It can log private keys and compromise accounts. Also, one should take extra care not to use second-hand hardware wallets. Examples: Ledger, Trezor, and KeepKey.
  • Paper Wallets: Paper wallets provide the highest level of security than all the other types of wallets. The private keys are stored on paper and then kept in a secure location that is known only by the people that are trusted. Paper wallets are well protected against any type of hacking and malware. However, one thing to consider when using paper wallets is that paper can be worn out with time. If they are printed, the printer ink can leak in case of contact with water or increased temperature. Examples: and Bitcoin Armory allows you to print your paper wallet.

3. Multi-signature wallet: Multi-signature wallets are those wallets that require more than one private key to execute a transaction. The number of private keys required depends upon the initial configuration of that wallet. It can either be 2-of-3 keys, or 3-of-5 keys. It contains two main advantages:

  • It provides more security and prevents any single point of failure. In 2-of-3, even if the hacker gets hold of one private key, It cannot do anything malicious. A hacker needs to hack more than one account simultaneously.
  • Also, it provides decentralization. Suppose an organization has 5 board members and each of them holds a private key to the organization’s account. 3 private keys are required to perform a transaction. No one is in majority and decisions can be made democratically. Even if one member loses interest in the project, other members can still work for the profit of their organization. Example: BitGo

4. Multi-currency wallet: Multi-currency wallets, as the name suggests, are those types of wallets that allow the user to store more than one cryptocurrency in the same wallet. This means that it can perform transactions that require Bitcoin, Ethereum, etc. using the same wallet. Also, an additional feature that allows converting one cryptocurrency to another is desirable and can be achieved through ShapeShift integration in your wallet. Example: Exodus 

Criteria To Choose Blockchain Wallet

 It depends on the preference and usage type. There is a tradeoff between convenience and security. 

  • Convenient wallets are less secure while secure wallets are not as convenient to use. 
  • If the funds are used for a shorter time and easily accessible for day-to-day transactions then choosing hot wallets while cold wallets will be helpful if considering storing funds for a longer period of time.
  • Choose a blockchain wallet that allows one to control the private keys and save them on the local device or offline.
  • Choose a blockchain wallet compatible with multiple operating systems.
  • Choose a blockchain wallet that comes with a backup seed phrase and with security features like passwords.
  • Select a wallet that is easy to use and has an active development company for maintenance, support, and improvement.

Benefits of Blockchain Wallets

The following are some of the benefits of blockchain wallets:

  • No geographic barriers: Blockchain wallets helps to facilitate borderless transactions across different geographic locations without difficulties of conversions and expenses of foreign exchange.
  • No intermediaries: There are no intermediaries in transactions carried out using blockchain wallets. Thus, there is no single point of failure as there is a central governing authority.
  • Fewer transaction fees: There are fewer transaction costs using blockchain wallets, especially when transacting huge amounts of money.
  • Security: Blockchain wallets provide better security and privacy of transactions due to the use of cryptography.
  • Simple signups: Blockchain wallets have simple sign-up procedures compared to bank accounts that have strict legal and complicated procedures and verification needs.
  • Easy to manage: They are easy to create, and manage.

Challenges of Using Blockchain Wallets

There are many advantages of blockchain wallets over traditional bank accounts but there are some challenges also in using blockchain wallets:

  • Low acceptance: They have low acceptance and applications as there are still many retailers and merchants that don’t accept cryptocurrencies.
  • Price fluctuation: The volatility of cryptocurrencies is one major cause of the less popularity of blockchain wallets.
  • Limited network: Blockchain wallets have limited support for legacy and the network is also limited.
  • Complicated Refunds: If the cryptocurrency is transferred mistakenly into some person’s account, then there is no way to get a refund of the amount paid. All one can do is to ask the person for a refund and if the request is turned down, then just forget about the money.
  • Securing seed phrase: The security of the account may get compromised if the seed phrase is not kept secure.

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