10.05.2022 Crypto Basics

Centralized vs decentralized crypto wallets

Centralized vs decentralized crypto wallets

Cryptocurrencies and blockchain are already a well-known topic for many people. The whole world watched the incredible growth and subsequent fall of bitcoin, the emergence of new cryptocurrencies, and the disappearance of many of them. However, there are topics that still raise questions. These include a cryptocurrency wallet.

We all know that a regular wallet is needed in order to store money and bank cards. At the same time, everyone knows the principle of operation of cryptocurrencies and blockchain: transaction data is recorded in the blockchain, and everything is open and available. Then the question arises: why do we need a crypto wallet if it does not store anything? You will get the answer to this question by reading this article.

Cryptocurrency Wallet: The Basics

Imagine you want to start investing in cryptocurrencies or just earn income in cryptocurrencies. To do this, you need to know how and where to store this asset.

If we take the general concept of a cryptocurrency wallet, then it acts like a well-known wallet for storing money. That is, it provides you with assets in the event of a purchase or exchange of your funds. At the same time, there are important differences between these types of wallets.

Kinds

A centralized wallet is a program that is owned and operated by a centralized third party. It has exclusive access and control over the funds. To make it easier to understand the essence, let’s look at an example. Let’s take an ordinary bank. As long as the money is in the bank, he can dispose of it. 

Imagine that he went bankrupt, you will lose your deposits. Also, the bank may restrict access to your own funds. In addition, you are forced to pay a bank service fee. Those who use a centralized wallet generally do not have access to private keys. This type of wallet to some extent contradicts the principle of blockchain. Moreover, this type of crypto wallet management creates a great risk for asset owners in case of dishonest management by a third party.

Decentralized wallet. This type of wallet implies that all transactions with funds are carried out by a person who owns a private key. Although this type does not guarantee complete anonymity, it gives the right to dispose of assets without the participation of a third party. When using a decentralized wallet, you must understand that you are solely responsible for managing the funds. If you lose or forget the private key, then the provider will not be able to recover the password or mnemonic phrase, since only you have access to the data. Therefore, we advise you to store the private key in at least two copies. But remember that only you should have access to the key data.

Conclusion

Since cryptocurrencies do not exist in physical form, the wallet is the main means for the user to interact with the blockchain to conduct transactions with crypto assets.

It is important to remember that the private key gives direct access to your assets, so your main task is to restrict access to it. The public key can be used to receive currency from other users.

There are several types of crypto wallets: centralized and decentralized, cold and hot, and web, desktop and mobile. The most secure are decentralized, cold, desktop and mobile wallets.

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