A cryptocurrency wallet is an application or device generating private and public keys, creating blockchain addresses for you to make, sign, and send transactions to a blockchain from those addresses. Safe and convenient storage and use of the private key is the main function of any crypto wallet.
To put it simply: it is impossible to make crypto transactions without a crypto wallet, used for secure storage and interaction with a private key.
However, not all wallets fulfill this function equally well. To choose the right wallet, it is better to understand the pros and cons of each type of wallet. Let's start with a classification of crypto wallets.
First and foremost, there are custodial and non-custodial wallets.
What are custodial wallets?
Custodial wallets store a private key with a custodian, a third-party organization you trust with a key. It is usually a company that has produced and supported the wallet.
Pros of custodial wallets:
- If you lose your key, the custodian will help you recover it.
- Custodian wallets are often integrated with useful services, like Binance exchange. When you deposit crypto on Binance, you benefit from a Binance custodian wallet. It is a convenient wallet for trading, depositing, etc. Binance, being a custodian, has full access to your funds and leaves you out of unnecessary operations.
Cons of custodian wallets:
- A custodian has access to your private key and your crypto. A custodian technically owns your funds.
- A custodian's failure of operation results in your temporal loss of access to your crypto.
- A custodian can get hacked and have all available crypto stolen (including yours) . It happens often.
To put it simply: with a custodial wallet, you entitle someone else with a right to store your private key. Such wallets are easy to use and often integrated with useful services (exchanges), but you don't actually own your crypto, and the risk of your private key leaking is high.
With non-custodial wallets, you store a private key yourself: a computer, smartphone, or a special device.
Pros of non-custodial wallets:
- Only you control a private key, and therefore your cryptocurrency.
- A wallet is autonomous, you can send crypto wherever you want.
Cons of non-custodial wallets:
- You need to back up your private key as if you lose your wallet, no one can help you to restore the key.
- To synchronize your wallet with different services, you have to connect to them separately (for example, via WalletConnect).
To put it simply: with a non-custodial wallet you are responsible for your private key, so you need to arrange your backup in case of loss.
Crypto wallets are also classified based on their Internet connections.
Hot wallets are connected to the Internet permanently or regularly. Usually, hot wallets are computer or smartphone apps, or browser extensions. Hot wallets store private keys on the app in an encrypted form or in the cloud. Hot wallets can be both custodial and non-custodial.
Pros of hot wallets:
- User-friendly and fast. It's just an app, we all use different apps all the time, so it's not difficult.
- Most hot wallets are free of charge.
Cons of hot wallets:
- Not safe. A hot wallet can be hacked. Even if hot wallets are tamper-free and well-secured, some vulnerabilities can be revealed. When a hot wallet makes a transaction, it potentially exposes your private key from your computer or smartphone memory, after which your key can be stolen. Storing your private key in the cloud is even less secure.
To put it simply: a hot wallet is a digital repository of a private key with Internet access. Though a hot wallet is an easy-to-use and free or low-cost option, storing a key in such a wallet is risky.
Cold wallets are autonomous devices without Internet access. A private key is stored on a secure chip of a device, and it doesn't end up on your computer or smartphone. A cold wallet is connected to a computer or smartphone for signing and sending a transaction, but even if the computer or smartphone is hacked, the key can not be leaked as it does not leave the chip.
Cold wallets, with few exceptions, are non-custodial. However, if you trust someone with your cold wallet and ask them to perform transactions for you, it is a cold custodial wallet.
Pros of cold wallets:
- Secure protection of a private key and crypto. It's the only secure way to store your private key.
Cons of cold wallets:
- Not for free. Usually, it is a high-tech and rather expensive device.
- Fault-prone. In case of failure, you can rely on a private key backup.
- Less user-friendly than hot wallets.
To put it simply: a cold wallet is an autonomous device for storing a private key without Internet access. It is the safest option as a private key does not leave a chip, therefore it cannot be stolen.
The Tangem Wallet is a cold non-custodial wallet without any faults common to other cold wallets. The Tangem app and secure NFC chip make the Tangem Wallet easy to use. All non-private-key-related functions are performed in the app, hence Tangem is free of unreliable additional components, such as display, buttons, wires, and battery. The Tangem Wallet consists only of a secure chip with NFC, wrapped in a plastic card.