Cryptocurrency wallet

Overview

A cryptocurrency wallet is a device, physical medium, program or an online service which stores the public and/or private keys for cryptocurrency transactions. In addition to this basic function of storing the keys, a cryptocurrency wallet more often offers the functionality of encrypting and/or signing information. Signing can for example result in executing a smart contract, a cryptocurrency transaction (see "bitcoin transaction" image), identification, or legally signing a 'document' (see "application form" image).

History

In 2008 bitcoin was introduced as the first cryptocurrency following the principle outlined by Satoshi Nakamoto in the paper “Bitcoin: A Peer-to-Peer Electronic Cash System.” The project was described as an electronic payment system using cryptographic proof instead of trust. It also mentioned using cryptographic proof to verify and record transactions on a blockchain. The first wallet program, simply named Bitcoin, and sometimes referred to as the Satoshi client, was released in January 2009 by Satoshi Nakamoto as open-source software. In version 0.5 the client moved from the wxWidgets user interface toolkit to Qt, and the whole bundle was referred to as Bitcoin-Qt. After the release of version 0.9, the software bundle was renamed Bitcoin Core to distinguish itself from the underlying network. Bitcoin Core is, perhaps, the best known implementation or client. Forks of Bitcoin Core exist, such as Bitcoin XT, Bitcoin Unlimited, and Parity Bitcoin.

Software wallets

Software wallets are software applications that allow users to manage and transfer digital assets, and sign messages. There are several modes in which software wallets can operate. They have an inverse relationship with regard to trustlessness and computational requirements.

Full clients verify transactions directly by downloading a full copy of the blockchain. They do not require trust in any external parties. Full clients check the validity of mined blocks, preventing them from transacting on a chain that breaks or alters network rules. Because of its size and complexity, downloading and verifying the entire blockchain is not suitable for all computing devices. Lightweight clients consult full nodes to send and receive transactions without requiring a local copy of the entire blockchain (see simplified payment verification – SPV). This makes lightweight clients much faster to set up and allows them to be used on low-power, low-bandwidth devices such as smartphones. When using a lightweight wallet, however, the user must trust full nodes, as it can report faulty values back to the user. Lightweight clients follow the longest blockchain and do not ensure it is valid, requiring trust in full nodes. Third-party internet services called online wallets or webwallets offer similar functionality but may be easier to use. In this case, credentials to access funds are stored with the online wallet provider rather than on the user's hardware. As a result, the user must have complete trust in the online wallet provider. A malicious provider or a breach in server security may cause entrusted crypto to be stolen. An example of such a security breach occurred with Mt. Gox in 2011.

Cold storage

"Cold storage" simply means keeping the private keys out of reach of hackers by storing or generating them on a device that is not connected to the internet. The credentials necessary to spend crypto can be stored offline in a number of different ways, from simple paper printouts of private keys, to specialized hardware wallets.

Paper wallets

A paper wallet is created with a keypair generated on a computer with no internet connection; the private key is written or printed onto the paper and then erased from the computer. The paper wallet can then be stored in a safe physical location for later retrieval. Physical wallets can also take the form of metal token coins with a private key accessible under a security hologram in a recess struck on the reverse side. The security hologram is tamper-evident technology which self-destructs when removed from the token, showing that the private key has been accessed. The British Museum's coin collection includes four specimens of funded bitcoin tokens; one is currently on display in the museum's money gallery.

Hardware wallets

A hardware "wallet" is a small and portable computer peripheral that signs transactions as requested by the user. These devices store private keys and carry out signing and encryption internally, and do not share any sensitive information with the host computer except already signed (and thus unalterable) transactions. Because hardware wallets never expose their private keys, even computers that may be compromised by malware do not have a vector to access or steal them.The user sets a passcode when setting up a hardware signer. As hardware signers are tamper-resistant, without the passcode the assets cannot be accessed.

Multisignature wallet

In contrast to simple cryptocurrency wallets requiring just one party to sign a transaction, multi-sig wallets require multiple parties to sign a transaction. Multisignature wallets are designed to increase security by requiring a predefined threshold of signatures from independent private keys to authorize any transaction.

Private and public key generation

A cryptocurrency wallet works by random number being generated. The number is converted to a private key using the specific requirements of the cryptocurrency. A public key is then generated from the private key. This private key is used by the owner to access and send cryptocurrency, while the public key can be shared to any third party to receive cryptocurrency. Up to this stage no computer or electronic device is required and all key pairs can be mathematically derived and written down by hand. The private key and public key pair (known as an address) are not known by the blockchain or anyone else. The blockchain will only record the transaction of the public address when cryptocurrency is sent to it, thus recording in the blockchain ledger the transaction of the public address.

Duplicate private keys

Collision (two or more wallets having the same private key) is theoretically possible, since keys can be generated without being used for transactions, and are therefore offline until recorded in the blockchain ledger. However, this possibility is effectively negated because the theoretical probability of two or more private keys being the same is extremely low. The number of possible wallets and thus private keys is extremely high, so duplicating or hacking a certain key would be inconceivable.

Seed phrases

In modern convention a seed phrase is now utilised which is a random 12 to 24 (or even greater) list of dictionary words which is an unencrypted form of the private key. (Words are easier to memorize than numerals). When online, exchange and hardware wallets are generated using random numbers, and the user is asked to supply a seed phrase. If the wallet is misplaced, damaged or compromised, the seed phrase can be used to re-access the wallet and associated keys and cryptocurrency in toto.

Wallets

A number of technologies known as wallets exist that store the key value pair of private and public key known as wallets. A wallet hosts the details of the key pair making cryptocurrency transactions possible. Multiple methods exist for storing keys or seeds in a wallet. A brainwallet or brain wallet is a type of wallet in which one memorizes a passcode (a private key or seed phrase). Brainwallets may be attractive due to plausible deniability or protection against governmental seizure, but are vulnerable to password guessing (especially large-scale offline guessing). Several hundred brainwallets exist on the Bitcoin blockchain, but most of them have been drained, sometimes repeatedly.

Characteristics

In addition to the basic function of storing the keys, a cryptocurrency wallet may also have one or more of the following characteristics.