A crypto wallet is a place to store your private keys (essentially passwords) which give you access to blockchains and allow you to sign for crypto transactions. They also provide a more friendly interface for users to manage their assets. Remember when we covered layers in the Blockchain section? Well, wallets are an example of an L3. There are many different types of wallets. Custodial wallets, non custodial wallets. Hot wallets and cold wallets. Online wallets and offline hardware wallets. There are even paper wallets.
Satoshi Nakamoto, who held the first crypto wallet, sent Hal Finney (a correspondent of Satoshi) 10 Bitcoin as a test to see the concept in action.
Crypto wallets come in various forms as we just mentioned. This video by MoneyZG talks through each option with examples and how they work.
Custodial wallets mean users are no longer in full control of their assets. They are very common and convenient. They're often offered by crypto exchanges who hold onto the private keys. Non custodial wallets are the opposite. You as the user remain in full control of your assets and you are responsible for holding and keeping your private key secure. Your private key is generated from a 12 word seed/recover phrase which can be used to get access to your wallet. The pros and cons between these two are quite self explanatory. You can go for ease/convenience or full control and responsibility.
Anyone who knows the private keys or seed phrase can gain full access to your wallet any any assets associated with it. Do not store your private key or seed phrase digitally under any circumstances.
Hot wallets are online wallets, cold wallets are offline wallets. For hot wallets, private keys are stored and encypted on the apps, making them more susceptible to security flaws. Cold wallets are not connected to the internet and are less convenient if you need to trade. You can have both hot and cold wallets at the same time. It's deemed poor security practice to hold large amounts of crypto in a hot wallet. Metamask and wallets on exchanges are examples of hot wallets. Hardware and paper wallets are examples of cold wallets.
Hardware wallets are handheld devices that look somewhat similar to a USB drive. They are controlled in person and you sign transactions by physically pushing a button. Hardware wallets are considered cold wallets because they are considered inactive until plugged in to a computer. Ledger and Trezor are well known hardware wallets.
Paper wallets was the name that was used for early users who wrote their keys down on paper. You could consider this risky as you can quite easily throw away or lose a piece of paper but at the same time your keys are kept offline and therefore safe from digital attacks.
This video isn't necessarily something you need to watch fully however it's interesting to see a hardware wallet, what it looks like and how it's set up. Feel free to skip parts of the video, just make sure you're comfortable in knowing what a hardware wallet is like.
What is the main difference between custodial and non custodial wallets?