As is the case with fiat currency (or paper money), we need a place or a medium to store our funds to avoid it being stolen. With cryptocurrencies, we also use a wallet, but how it works is not exactly the same as our conventional physical wallet.
With a wallet, we can store our funds, check its balance and perform transactions. There are a number of types of wallet available for use with each type offering distinct pros and cons over the other. But first, let’s see how it works.
In the case of Ether (ETH), it resides in the Ethereum blockchain and it stays in there for as long as the blockchain exists. It will never leave the blockchain, ever. This is not the same as paper money where we can physically keep them in banks, withdraw them, move them around and later keep them in our wallet for whenever we want to use them.
Since ETH is intangible and cannot be taken out of its respective blockchain, a wallet works by sending instructions or commands to the blockchain whenever we perform a transaction. In short, a wallet is a control panel or an interface with which we can instruct the blockchain to do tasks involving our funds.
So where in the Ethereum blockchain exactly is our ETH stored?
In a gold vault, gold bars are stored and sorted according to their own respective owners. Similarly, the ETH we own is stored in an address inside the blockchain that is exclusive to us. When we first create a wallet, a string of random numbers and letters, called Public Address or Public Key, is given to us. This is the address in which our ETH is stored and it is the information we give whenever people want to transfer funds to us.
Complementary to the Public Key is the Private Key. This looks a lot like a Public Key but please keep in mind that this should always and only be accessible to us. This acts as a proof of ownership that verifies us as the owner of a Public Key. If Public Key is an email address, then Private Key is the password.
Types Of Wallet
As mentioned earlier there is a lot of types of wallet, but essentially they all fall under two major categories.
Is an online wallet that stores both our Public Key and Private Key online which makes it easy for us to access our address anytime and anywhere as long as we have access to the Internet. It is convenient but there are chances of losing our funds to hacks.
Is an offline wallet that stores our Public Key and Private Key offline and only connects to the Internet when we want them to. It is the more secure and recommended choice as it is less exposed for possible hacks or theft.
Depending on the wallet, some gives us access to our private keys while some others do not. Before creating or using a wallet, it is recommended to research thoroughly on it as to avoid unwanted issues.
Mobile Wallet / Hot
As the name suggested, mobile wallets are wallet apps for smartphones. They are usually straightforward and pretty basic in terms of features and functions.
Desktop Wallet / Hot
Used on a desktop and usually offer a lot more functions and features than other types of wallet. Some desktop wallets require you to run as full node (downloading the whole Ethereum blockchain on your computer).
Web Wallet / Hot
Web wallets, or online wallets, are usually websites that provide wallet service. They are light and fast to use and can be accessed anywhere via a browser.
Paper Wallet / Cold
Essentially, it is your public key, private key and a QR code to your address printed on a piece of paper. This is perhaps the safest alternative as it is always offline and only accessible to you.
Hardware / Cold
The most used offline wallet as they offer many security and backup measures to keep our funds safe. Aside from the private key, hardware wallet also offers 2 factor authentication and PIN password features.
For a list of recommended wallets, please refer to our wallet directory here