A crypto wallet is a type of digital wallet used for keeping cryptocurrency and other digital assets like non-fungible tokens or NFTs. You might be more familiar with other digital wallets like ApplePay or Venmo that are used to hold traditional money like dollars in a digital format. People in the cryptocurrency world call national currencies “fiat” currencies to indicate that they were created by a government or national central bank.
The crypto wallet is designed to be a repository for assets that only exist in the digital world, usually in a decentralized or peer-to-peer system.
Starting with Bitcoin, many of the first cryptocurrencies were truly decentralized. Now new sorts of coins and tokens are more tied to fiat currencies or managed by a particular institutional administrator. Examples include stable coins like Tether (USDT) which is pegged to the U.S. dollar and branded coins like JPM Coin created by banking giant J.P. Morgan.
Types of Digital Wallet Technologies
One commonality with different types of digital wallets is that they have to have a way to accept, hold, and release various digital assets.
Some digital wallets use QR codes. Others use near-field contactless systems to transfer assets into and out of the wallet. Others use a magnetic system called MST.
Types of Assets
Although many digital wallets were made to hold cryptocurrency and NFTs, some also hold digital forms of national fiat currencies, like the dollar. For example, a smartphone holder can put some of his or her money into a digital wallet that will be used for contactless payments.
Hardware and Software Wallets
Two very different types of digital wallets are hardware and software wallets.
A software wallet has no independent hardware. The software wallet gets downloaded onto a computer or other user device. In this scenario, the digital wallet doesn't have a physical "body". It's a software program made of code.
A hardware wallet has its own hardware. One easy way to think about a hardware wallet is as a USB-connected flash drive with wallet technology built into it. The wallet may transfer through QR codes or some other contactless system, but it might also work by plugging it into the USB port on a computer.
In either case, with the software wallet or the hardware wallet, if the hardware is lost, so is the currency. This problem is solved by keeping cryptocurrency or other digital assets on exchanges on web3, where they are essentially backed up in the cloud – in other words, they are residing in centralized systems so that the individual holder doesn't have to manage his or her own hardware.
The downside to this is lack of control for the digital asset holder. Keeping crypto assets in digital wallets unconnected to exchanges appeals to people who want to protect them from different kinds of hacking and loss. In a digital wallet that is disconnected from the Internet, the holder has full, unmitigated custody.
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