What’s in a cryptocurrency wallet? That seems to be an unremarkable question. At least until its given further thought, because the answer is really nothing at all. That is, a cryptocurrency wallet doesn’t actually contain coins. It only functions as if it does. Perhaps a better question to ask is “What are wallets and how do they work?” A few (albeit imperfect) analogies may help answer this question.
Note, however, if you’re simply seeking advice on how to quickly backup and restore your wallet, its best to review XBY’s well-written tutorials (both for Windows users or those using Paper wallets). These articles explain in greater detail how such crypto wallets actually work.
Debit Card vs “CryptoCard”
The majority of crypto wallets are software-based and are thus programmed to run on your desktop or smartphone. Although fully digital, crypto fans often depend upon them in the same way they might a debit card. Like a physical debit card, a cryptocurrency wallet doesn’t actually hold currency. They’re simply used as a tool to access currency held elsewhere.
In the case of your debit card, virtual money is often deposited into your bank electronically (ie direct deposit). While a debit card user may never see or feel their money they can utilize its value nevertheless (although it must be stated that physical currency has no real intrinsic value either!).
In the case of your “cryptocard”, the “bank” is the blockchain. The “wallet” is how users communicate to the blockchain (in order to send/spend coins). And the user’s blockchain address functions as a kind of an account number with which to receive coins. Once a user has an address, they won’t need the wallet again until they seek to withdraw coins “out” of the wallet.
The difference between your debit card and the cryptocard (wallet software) is that your debit card can be replaced. Your cryptocard can be replaced as well (that is, re-installed or restored on a different computer). However, your private keys – which are definitely NOT a public account number – cannot be replaced. There is no “bank” to turn to in order to get a new key number. The blockchain record will exist, but there is no way to recover a private key from the blockchain. At best, the wallet software can create a new address for you, but if you lose access to the private keys belonging to an address, its impossible to access the coins they’re authorized to spend..
Two Quick Examples
You go to that sketchy corner store to get a candy bar during a really bad chocolate craving. You pay with a) your debit card or b) your cryptocard.
- a card number and expiration date are the only numbers that an untrustworthy counter clerk needs to access your money. Since you handed them the card, they have this information. Even if you self-pay using a card reader, the latter can be rigged to hijack card information and send it elsewhere. Even worse, just walking around and passing through a magnetic field can get your card information skimmed. While getting a new debit card number is a bit of a pain, it can be done through the issuing bank.
- Your account number (wallet address – public key) is all the untrustworthy counter clerk sees. They can tell how much money you have on your cryptocard if they look at the block explorer (i.e. how much you have in that address… which could be your total amount, unless you split your wallet into a “safe to spend” amount hot wallet and create a “this is going to be my retirement” offline wallet. In this case, they’d be able to see the value of your “hot wallet” account). No matter what they do with this public key, they won’t be able to access your funds without the secret private key (you have backed up somewhere else).
The next big difference between a cryptocard and a debit card is how one’s money is accessed and stored.
A bank account is private. Only you and the bank know how much money is deposited within the account. In contrast, the deposit amounts of coins owned by every address on the blockchain can be viewed by anyone (as the address serves as a kind of account number). As a “public ledger,” the blockchain enables every purchase/transaction (the sender, receiver, and amount) to be made public. Accordingly, the concept of bitcoin being anonymous doesn’t mean that particular transactions cannot be traced/audited/etc. It simply means that individuals are not identified as such on the blockchain; you’re just a random address.
Perhaps the most fascinating feature about a wallet is its ability to instantly produce a new address. As stated above, users can view the total amount of cryptocurrency in any wallet on the blockchain. By creating additional crypto wallets, they can also transfer funds and prevent any address from accumulating too many coins.
For best practices, crypto users should keep the bulk of their coins “in” an offline wallet. This can be created by purchasing a hardware wallet (which is expensive, and none currently support XBY) or exporting the private keys/backing up the .dat file (see the links in paragraph 2). The latter is practically free if you have a thumb drive and a printer.
Unfortunately, a perfect analogy to private keys doesn’t quite exist. A safety deposit box – where the bank has the key to the room, and a required second key to access your box – is perhaps the closest available. Users can’t get into the box (spend coins) without these keys, and no one else can spend a user’s coins without getting a hold of them. However, this analogy breaks down because, unlike private key users, a deposit box user is the only person that knows what’s in the box.
In some ways, private keys are akin to a digital signature. This is what the blockchain looks for in order to authorize a withdraw from your wallet address. Essentially, your public address can be spoofed all it likes. Without your “private key” signature, the transactions will be removed as fakes. This is why private key security is vital to securing your funds.
Hopefully, the analogies I’ve presented above place digital wallets in greater context. More importantly, I hope that they drive home the importance of wallet security. Having one’s private keys listed online is dangerous (whether one’s wallet is online or one’s backups are online/in the cloud/on a pc connected to the internet).
Even though it doesn’t contain anything, the wallet itself is the portal to the magical kingdom of the blockchain. And there’s nothing worse than trying to get into the magical kingdom and realizing that you’ve lost your (private) keys.