Cryptocurrency Wallets

Why This Matters

Cryptocurrency wallets sit at the intersection of cryptographic security and user accessibility—two concepts you'll see tested repeatedly in blockchain coursework. Every wallet type represents a different answer to the fundamental question: how do we balance convenience against security when managing private keys? Understanding this tradeoff is essential because wallets don't actually "store" cryptocurrency; they store the private keys that prove ownership of assets recorded on the blockchain.

You're being tested on more than just definitions here. Exam questions will ask you to evaluate which wallet type fits a specific use case, explain the security implications of different key storage methods, and analyze how wallet architecture affects transaction signing, key management, and attack surface exposure. Don't just memorize what each wallet does—know why it exists and what security principle it demonstrates.

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Wallets by Connectivity: The Hot vs. Cold Divide

The most fundamental distinction in wallet design is whether the device storing private keys connects to the internet. This single factor determines the primary attack vectors a wallet faces.

Hot Wallets

• Internet-connected by design—enables real-time transaction signing and immediate access to funds
• Primary attack surface includes malware, phishing, and remote exploitation since keys exist on networked devices
• Best for active trading and small amounts you need to move quickly, not long-term holdings

Cold Wallets

• Air-gapped from the internet—private keys never touch a networked device during normal operation
• Dramatically reduced attack surface since remote hackers cannot access keys that aren't online
• Trade convenience for security—requires physical access and additional steps to sign transactions

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Physical Storage Solutions

Some wallets exist as tangible objects, removing private keys from the digital environment entirely. The security model here relies on physical possession rather than software defenses.

Hardware Wallets

• Dedicated secure element chips—store private keys in tamper-resistant hardware that signs transactions internally
• Transaction verification on-device means even a compromised computer cannot alter transaction details without user confirmation on the hardware screen
• Support for multiple cryptocurrencies through firmware updates, making them versatile for diverse portfolios

Paper Wallets

• Private keys printed or written on physical media—completely immune to digital attacks while stored
• Single-use design in practice—importing a paper wallet to spend funds typically exposes the key, requiring transfer to a new wallet
• Physical vulnerabilities include fire, water damage, fading ink, and theft; no recovery mechanism if destroyed

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Software-Based Wallet Types

Software wallets run as applications on general-purpose computing devices. Their security depends heavily on the underlying device's security posture and the wallet's implementation.

Desktop Wallets

• Full control over private keys—software runs locally, and keys never leave your machine unless you export them
• Vulnerable to device compromise including keyloggers, clipboard hijackers, and malware targeting wallet files
• Suitable for intermediate users who maintain good computer hygiene and want more control than web wallets offer

Mobile Wallets

• Optimized for point-of-sale transactions—QR code scanning and NFC enable quick in-person payments
• Leverage mobile security features like secure enclaves, biometric authentication, and sandboxed app environments
• Risk profile tied to phone security—a lost or compromised phone can mean lost funds without proper backup

Web Wallets

• Custodial model typically—the service provider generates and stores private keys on their servers
• "Not your keys, not your coins" principle applies; you're trusting a third party with actual ownership
• Maximum convenience, minimum control—accessible anywhere but subject to service provider hacks, shutdowns, or seizures

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Advanced Wallet Architectures

Beyond basic storage, some wallet designs implement sophisticated cryptographic techniques to enhance security, privacy, or usability. These architectures solve specific problems that simpler wallets cannot address.

Multi-Signature Wallets

• Require $m$-of-$n$ signatures—for example, 2-of-3 means any two of three designated keyholders must sign to authorize a transaction
• Eliminate single points of failure since no individual key compromise can result in fund theft
• Essential for organizational use including corporate treasuries, DAOs, and escrow arrangements where trust must be distributed

Hierarchical Deterministic (HD) Wallets

• Single seed phrase generates unlimited keys—a master secret (typically 12-24 words) mathematically derives all child keys
• New address per transaction improves privacy by preventing address reuse and making transaction graph analysis harder
• Simplified backup and recovery—losing the device doesn't matter if you've secured the seed phrase; entire wallet reconstructs from it

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Quick Reference Table

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Self-Check Questions

1. A user wants to store a large amount of cryptocurrency for several years without touching it. Which two wallet types would you recommend, and what vulnerability do they share despite being "cold" storage?

2. Explain why web wallets violate the "not your keys, not your coins" principle, and identify which other wallet types avoid this problem.

3. Compare multi-signature wallets and HD wallets: what specific security problem does each solve, and in what scenario would you recommend one over the other?

4. A mobile wallet and a hardware wallet both sign a transaction. Describe the key difference in where the private key exists during the signing process and why this matters for security.

5. If an FRQ asks you to design a wallet solution for a three-person startup managing shared funds, which wallet architecture addresses their needs and what configuration (expressed as $m$-of-$n$) might be appropriate?