What is a wallet?
In the world of cryptocurrency a ‘wallet’ refers to a digital store of coins. These wallets exist as part of a cryptocurrency’s blockchain and their balance and transaction data is stored and updated as the blockchain grows.
Wallets are given unique addresses which are usually displayed as either a long strings of letters and numbers, or a QR code. Below is an example Litecoin wallet address from Loafwallet, a Litecoin Wallet app for iOS and Android:
These addresses are used to receive funds from other users; another Litecoin user can scan or copy/paste these addresses and manually send any amount of LTC that they choose. The transaction is verified and stored on the blockchain and the wallets of both the sender and the receiver of the funds have their balances updated. It is possible for one wallet to have multiple addresses; once created these addresses are never invalid and users can still receive funds through them
Disclaimer! These addresses are from an empty wallet that I have created in Loafwallet for the purpose of this article. Any coins sent to them will probably be used to fund my lavish lifestyle of avocado toast and macchiatos.
Loafwallet is a mobile ‘hot’ wallet and there are a few other types of wallets with specific use cases.
Types of wallet
Loafwallet is called a ‘mobile’ wallet as it is a mobile application available for iOS and Android devices. The term ‘hot’ wallet refers to the fact that the application is connected to the internet, as opposed to a ‘cold’ wallet which is kept offline.
Mobile wallets are an easy and accessible way for users to store their first cryptocurrency coins and are usually recommended for storing small amounts of funds for regular use, similar to a bank chequing or current account. Their level of security is about the same as any other app on your phone and if you are using one then you should make sure that your phone locks with a passcode or other security measure.
Cold wallets are recommended for storing larger amounts of cryptocurrency and function more as a bank savings accounts. You may have seen the term ‘Cold Storage’ when reading about cryptocurrency and it refers to a wallet which is kept away from the internet and is therefore deemed to be the most secure way of storing your funds. The most popular cold storage solutions include hardware wallets and paper wallets although some users will keep desktop wallets and USB wallets offline for security purposes.
Another type of wallet is a ‘web wallet’ such as blockchain.info. This is an online hosted wallet that is accessed via a web browser and usually secured with a password and 2-Factor Authentication. Some websites such as MyEtherWallet have been the regular target of phishing scams so always be careful to check the exact url that you are putting your sign-in details into, especially if you regularly use Google or Bing to find the website. Bookmarking these websites or typing the address manually helps to prevent you being directed to fraudulent phishing websites and will help to keep you and your cryptocurrency safe.
One of the key features of cryptocurrency is that individuals have ultimate control over their own funds. Due to having this level of control users also need to take responsibility for the security of their funds and one of the most important functions to learn about is that of a wallet’s private key.
Every crypto wallet comes with a ‘private key’ which is necessary for a user to send funds and is an essential part of how the cryptocurrency blockchain functions. This private key is longer alpha-numeric string than the public addresses are and it is this key that lets a user transfer funds out of the wallet. The private key is used during cryptocurrency transactions when the wallet interacts with the blockchain but it never needs to be seen by human eyes. This private key is what gives a user the ability to send funds and this is why it is so important to keep the key secure: anyone that you share your private key with has full access to that wallet and all the funds located in it.
When a user creates an account on an exchange they are also given a ‘hosted’ wallet. This means that the exchange holds the private keys to the wallet and if anything goes wrong on the exchange’s side then users funds can be lost. This is one of the reasons that it is recommended to keep most of your funds outside of exchange hosted wallets and on a wallet where you hold the private key.
Mobile wallets such as Loafwallet, Breadwallet and Jaxx allow users control over their own private keys and can be configured to provide additional passcode authentication. Hardware wallets such as the Nano Ledger S and Trezor are USB wallets which give the user control of their private keys and also come with additional protections such as a local passcode. These devices are only plugged in when a user needs to access their funds or transfer coins however while these wallets are the most secure, the onus is still on the user take care of where they store their device and to also have a back-up protocol.
Most wallets have a function which allows users to recover them via a Mnemonic Phrase. This is a random sequence of twelve words which functions as a back-up private key; you may also have seen this called a Mnemonic Seed. By using this phrase you can directly recover your wallet from the blockchain however there are a number of security concerns around the way that a user stores this mnemonic phrase.
The safest way is to physically write the phrase down and store it securely when you first create your crypto wallet. It is never recommended to store this information digitally because data that is stored on your computer can be subject to key-logging or screen-capturing malware.
Loafwallet is the official wallet by the Litecoin Association and is forked from the popular Bitcoin wallet ‘Breadwallet’. The code is open source and it is recommended not to use the wallet on a jailbroken or rooted device. Loafwallet can be installed directly through the App Store or Google Play Store. Bear in mind that the Android version is currently in beta and may be unstable.
Once installed Loafwallet will set up a wallet on your device and provide you with a recovery phrase as mentioned before. Please do not screenshot this but write it down and keep it somewhere safe! You will also be given the option to add a passcode and then will be taken to the home screen, where you can use the app to send and receive funds. The app has a built-in QR code reader and you can use this to transfer LTC in person, or by scanning a QR code online.
One thing to note is that on the ‘Receive’ tab you can tap the black ‘receive’ button to see four options, allowing you to email or text your new wallet address in QR code and alphanumeric form. This is a very handy way to receive funds from someone who cannot directly scan your device’s screen.
Loafwallet allows you access to your private keys and if you wish to import your funds into another wallet it is easy to do so. The app also supports the import of Mnemonic Phrases for recovery of your wallet if anything untoward is to happen.
There are many wallets that you can use and it is up to each individual to decide which wallet or combination of wallets suits them best. This article just scratches the surface and hopefully has provided you with the basic knowledge to go on and do some further research. Just remember..never share your private keys!