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Cryptocurrency wallets and how they work

What is a cryptocurrency?

Cryptocurrency is a virtual currency that uses cryptography to secure its transactions and verify the transfer of assets. Cryptocurrencies are a used as a medium of exchange globally, they include, Bitcoin, Ethereum, Litecoin and many more. Unlike fiat currency, cryptocurrencies are not physical in nature neither are they issued by a central authority.

What is a cryptocurrency wallet?

Cryptocurrency wallet is a secure digital wallet that stores private and public keys and communicates with corresponding blockchain to enable users to send and receive digital currency and monitor their balance. For an investor to use or trade cryptocurrencies, they will require a wallet as this is the most secure way of ensuring that your coins are safe and intact all the time. There are different types of crypto-wallets.

How does a cryptocurrency wallet work?

Crypto wallets work the same as normal bank accounts or safety deposit boxes. Crypto wallets were designed to ensure that people access, store, send, receive and track their digital currency holding. All crypto-wallets work the same despite having different characteristics and functionalities. As mentioned above the wallets store the private and public keys. Cryptocoins are stored on the blockchain, which in turn is stored on computers globally. Crypto wallet contains an address that is similar to the randomly generated public key. The public key is a long string of numbers and characters and just as the name suggests, its public information whereby anyone can view it. Without the combination of a private and public key one cannot be able to use their cryptocoins, hence the crypto wallet contains a private key that goes with that address/public key.

Today, most crypto wallets relate public and private keys to the Cryptos that match those keys, and then display the list of related transactions and the current balance in a format that is easy to understand. It is important to note that wallets do not store digital currencies but contain permission to spend (keys). The private keys are used to access the cryptocoins in a specific wallet and should not be shared. If you lose the keys (the access to permission to spend), it means you cannot access your cryptocoins hence you lose them.

The old wallets are full node wallets, meaning they fully validate transactions and blocks.  They update the blockchain network by passing the transactions received from one computer to another. Although the transmissions require a lot of effort, they do not require any actual effort from the wallet owner. These transmissions are done automatically. Most wallets are SPV that is Simplified Payment Verification.  The SVP wallets download only block headers and not the entire blockchain and this is believed to weaken the security of the entire network because they cannot give a clear distinction between a block with valid transactions and the one without. To curb this problem, crypto wallets rely on nodes that check the validity of a transaction and believe that once other blocks have been added on top, a transaction can be presumed to be correct.

Wallet technology is evolving at a high speed in terms of functionality, capability and efficiency. Future crypto wallets are expected to have added features that will enable the owners to pay bills, earn points through reward programs, do a comparison between items, and connect with household appliances. The same wallets will also be accepting credit and debit cards, NFC smartcards and QR codes.


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