How Cryptocurrency Wallets Work
It’s an essential component in the cryptocurrency world, and yet, much like blockchain technology itself, the functional mechanics of how cryptocurrency wallets function remain nebulous to many. Of course, a complete understanding of the technical side of a product isn’t at all necessary to employ its use. But for those of you who wish to get a better idea of how cryptocurrency wallets do what they do, read on.
A cryptocurrency wallet is a secure software program that is used to keep track of, send, and receive digital currency. If you wanted to distill what makes a cryptocurrency wallet different from any other kind of wallet, you might say that it’s important to understand that these wallets don’t actually store your cryptocurrency coins in a literal sense, but rather they store your public and private keys and allow you to interact with the blockchain. The blockchain, being a decentralized record of all the transactions that have taken place with any given cryptocurrency, stores the data necessary to prove how much of the currency you own. The keys allow this data to be accessed and shared when necessary. This makes cryptocurrency wallets significantly different from physical cash wallets and online bank accounts, which simply work by storing a representation of value (cash or fund data).
Understanding the difference between the private key and the public key is the best way to understand how cryptocurrency wallets operate to store your funds and make transactions. The keys work in tandem as a form of encryption that allows information about a transaction of currency to be securely added to the public ledger (blockchain). This kind of encryption is called asymmetric encryption. As their names suggest, the public key is publically available and the private key is known only by the user’s wallet. The steps in any transaction are as follows: the user who is to receive the coins sends their public key to the user who is to send their coins. The sender then uses this public key to encrypt a record of the transfer. They send this encrypted message back to the receiver who then uses their private key to decrypt the message. Because the message was encrypted using one of the receiver’s keys, they’re capable of decrypting it with the other, but no one else is because the private key never gets broadcasted.
This sophisticated two-key system allows private and secure transfers of funds that are recorded on a public ledger that all users can verify. Cryptocurrency wallets represent a remarkably secure way to store funds, but there are a couple of key tips to understand when using your wallet. First and foremost, it is important that you never lose your private key and that you never share this private key. It’s also important that you keep your software up to date at all times. This will ensure you have the latest security enhancements and that all the features of your digital wallet will work smoothly. Enabling optional protection measures such as two-factor authorization is another way to increase the security of your online digital wallet.