Wallets, Keys, Addresses, Accounts oh my!
If you’re in the crypto space you’ve probably heard of these terms and understand the meanings of each…or do you?
Blockchain technology is a game changer when it comes to how we think about storing and transmitting money (amongst other things). However, when it comes to how we define the common terms that surround this new decentralized monetary ecosystem, they may not always mean what they did in the archaic old-school banking system.
In order to get mass adoption of blockchain and cryptocurrencies, it’s REALLY important to make the technology very understandable and also usable. We’re still in the early adopter stage of crypto and are still figuring a lot of things out. This includes how the technology will work and how to define terms. Nonetheless, I felt compelled to write this article to dispel some assumptive myths in the space.
A Brief Monetary History
As most of us know, humans have been using physical goods, coins, and paper money for thousands of years to pay for things. Only recently has technology allowed us to start using digital representations of money for payment in the form of credit cards and online money transfers. These technologies have all developed fairly recently through siloed centralized companies and custodians which require trust on behalf of the user.
As a result, most of us in the developed world have been living with accounts of varying kinds (bank, credit card, etc.). If you’re like me, you probably don’t even deal with physical money most of the time and prefer to use digital methods of sending and receiving money.
The problem with using these huge centralized parties is that the trust we’ve given them to act responsibly, on our behalf, has been eroding since the dawn of the internet. Not only that, but hacking is on the rise and plenty of passwords and other personal information have been leaked, harming individuals.
This is one of many reasons why blockchain technology has come into existence. By removing monolithic third-party actors and decentralizing both governance and technology, we can solve both of the aforementioned problems.
With the dawn of this new technology, some of the terms which we were used to in the past, have changed a bit. This is mostly due to how the technology inherently works and some of the structural changes that come with it.
By removing a trusted third-party from these financial systems, the control, quite literally, flows back to the end user. You may have heard the term private key, which literally is the “key” to access your funds. With distributed ledgers, no longer does a central party and/or government have control and access to your funds! While this is good, plenty of new threats come into play.
Common Cryptocurrency Definitions
Let’s talk about common definitions of the past and how they relate to the new cryptocurrency version of those terms.
Let’s take the term wallet for example. In the past, a wallet generally referred to a physical thing that held physical money or coins. It was something we carried with us and would take out in order to purchase goods.
In the cryptosphere, wallet means something entirely different. It generally refers to something that holds your private key, which allows you to access or view your crypto funds. You can think of it more like a “keychain”. It actually holds no funds whatsoever!
Below you will find a grid which shows term equivalencies between old and new monetary systems.
|Blockchain Definitions||Old-School Banking Definitions|
|Public Address||Account (Number)|
|Wallet||Keychain (It’s not a banking term, I get it)|
Let’s define the above terms to make sure we’re all on the same page.
- Account – A digital place where funds are stored, tracked, received and sent. These accounts are managed by large trusted third-parties like banks and credit issuers.
- Password – A private combination of alphanumeric characters which only an end-user knows. The end user uses this to access various accounts with third-parties. Third-parties have control over the requirements and management of this password.
- Public Address – A public facing “location” on a blockchain where funds can be viewed and accessed.
- Private Key – A string of alphanumeric characters similar to a password where only the creator of the public address/private key combo has access (no third party knows the private key and shouldn’t!)
- Wallet (Crypto) – A device, software, or written document containing the private key needed to access your funds.
Before we get into more detail, let’s talk about custodianship. Custodianship refers to a financial institution or third-party which holds or controls access to assets on behalf of its customers. In the case of crypto, this means that a custodian (like Coinbase) would control your private keys. There are both benefits and drawbacks to this approach, but we’ll save that for another article.
When it comes to blockchain technology, there really is no singular place where your funds are stored. It’s not like a physical wallet where there is one location and you and only you can see your funds. On a public blockchain, every node or person knows and can see how much money a particular public address has. It’s replicated across the entire blockchain and every party comes to an agreement all the time on the amount of funds in every address (this happens automatically). As long as you have the public address, you can see the funds. And yes, there are blockchains focused on making crypto private (so no one can see how much anyone has), but we’ll get to that in another article.
Private keys (or the password to access your crypto funds) become very important in cryptoland. No longer can you rely on a trusted third party to let you reset your password if you forget it. If you don’t backup your private key, and you forget it, your funds might be “lost” forever. This may seem like a bad thing, but it’s not. It’s just a new way to think about how we control and access our own funds in a digital manner. There are multiple ways to store and backup private keys so this type of issue doesn’t happen.
The concept of private keys are very important and function very differently depending on how you intend to invest and interact with cryptocurrency. The different categories of private key stewardship include: Exchanges, Hardware Wallets, Browser Plugins, and manually storing them.
Types of Crypto Wallets
The exception to the above is crypto exchanges (and eventually funds-once they start investing in crypto). Aside from buying, selling, or trading cryptocurrencies, crypto exchanges, like Coinbase, are custodians. This means they control the private keys for all accounts on their platform.
This can be both good and bad.
It’s good because exchanges allow you a username/password combo where you don’t need to know or store your private key and therefore can’t “lose” your funds forever. It’s bad in the sense that someone else still controls the ultimate destiny of your funds, similar to how a bank operates.
Exchanges are known to get hacked from time to time, like the recent $500 Million CoinCheck hack. Luckily, Coinbase is insured.
Day traders are unfortunately handcuffed, to an extent, as they rely on quick and easy access to their funds and almost always need to leave their funds on an exchange.
If you’re looking to purchase some crypto and lock it up for a long time, an alternative option to storing your crypto in exchanges are to store them in a cold storage solution, like hardware wallets.
As we talked about before, wallets don’t mean exactly what they used to in the past. Generally speaking, a wallet in crypto refers to something that stores private keys. The most popular and secure “wallet” today is something called a hardware wallet. Popular brands include Ledger and Trezor and it’s literally a piece of hardware which holds your private keys. You would plug it in to your PC, use an interface to access the blockchain (like MyEtherWallet or MyCrypto) and then you would have complete access to do what you please with your funds.
Adding to the confusion of the term “wallet”, was a website called MyEtherWallet. The website is really just an interface that allows users to view and access funds on the blockchain. In retrospect, a better term for the website could have been MyEtherAccess as the website never stored anyone’s private keys.
Make sure you write down your recovery passphrase and put them in safe locations (ideally a lockbox for one location).
The most popular browser plugin, Metamask, provides a layer of protection in between hardware wallets and storing your keys manually. Once you create a private key, you can install the MetaMask browser plugin and store your key in the plugin and create a password to use in the future. This prevents you from having to enter your private key directly on websites such as MyEtherWallet or MyCrypto (or worse, phishing sites which may be out to steal your private keys).
Manually Storing Private Keys (Paper Wallets)
Believe it or not, one way of storing your private keys involves writing them down on a piece of paper somewhere (or on your PC). If you utilize this method, make sure you make copies of the private key and hide them somewhere nobody can find. Ideally, you would put them in multiple locations.
This method is not recommended as private keys are generally very long and it’s very easy to lose a piece of paper (or a file on your PC). You’re much better off using MetaMask or better yet, buying yourself a hardware wallet. Read more about the best types of altcoin wallets.
The below info-graphic shows visually how all of the terms work together to create a blockchain system for storing and accessing your crypto assets.
As you can see, the way we use, think about, and most importantly access cryptocurrency is different than how we access traditional funds in the past with trusted third-parties (like banks). We’re still figuring out best practices and how to define some items. To me, the best part about crypto is we’re putting the control and access to assets back into the hands of the individuals.
Be sure to share this article if you enjoyed it and if you have any questions comment below!