A description of different kinds of cryptocurrency wallets and how they work.


Hi it’s Keir Finlow-Bates here. So the other day
I posted about how a cryptocurrency
wallet is not a wallet in the
traditional sense of something that you
have in your handbag or your pocket
in order to carry around your cash but
rather a better analogy is a password
manager, and I thought why not go through
the different kinds of, for example,
Bitcoin wallets that you can have and
look at them through this aspect, so
let’s start with the first one: a paper
wallet – well a paper wallet really is
just the equivalent of writing down your
password on a piece of paper, which
actually makes sense if it’s a password
that you only use, say, once every year or
two and you have a nice safe or locked
filing cabinet in which to keep it.
So that’s paper wallets. Then a brain
wallet: well a brain wallet is – because
you can’t memorize a long string of
numbers – why not take a word or even a
set of words and use those to derive
your password, so that you can carry it
around in your head. Now on the surface
of it a brain wallet sounds like a great
idea but it turns out that people are
not very good at picking secure pass
phrases, and the result of
that has been that a lot of brain
wallets have been hacked.
So that’s a method that I would not
recommend. Then we have software wallets,
so for example if you run the Bitcoin
core software, it comes with a wallet and
that wallet is like a password manager.
The Bitcoin core software will generate
new addresses with passwords for you and
it will store them for you and you don’t
have to worry about the passwords: you
just need to make sure that you’re
running your software wallet on a
computer that’s secure, and as I said it
basically equates to a password manager.
Then you can have a software wallet that
uses a “seed” in order to generate all
your different addresses and passwords.
So here you take one very secure
password, and it’s used to derive future
passwords and all future keys, rather, and
future addresses and the advantage of
this is that you can backup your entire
wallet by storing that passphrase
securely, and so this equates again to a
password manager: if you use something
like LastPass you have a master password
that allows you to log into LastPass and
then it retrieves all your other
passwords in LastPass, in this case it’s
securely from a server so it’s not
generating them from your master
password, but if you wanted a password
manager that – everything was basically
stored in the seed, you could kind of do
that. The only problem you have with a
password manager is that the passwords
tend to be linked to different websites,
and you can’t derive that … well you could
actually derive the password from the
website and the seed. I’m sure there’s
some good cryptographic reasons not to
do that though.
And then finally hardware wallets – so the
idea with a hardware wallet is that you
have a physical device and it generates
your passwords or again in
cryptocurrency, your private keys, for you
and stores them in that hardware device.
And the best hardware wallets will
actually never reveal what those
passwords or those keys are; instead what
a hardware wallet should do is keep them
locked away inside itself so they can’t
be hacked. You will have a a single
master password that you use in order to
unlock the properties of the hardware
wallet, and what it does is it will
create the transactions you need in
order to transfer your bitcoins or your
other cryptocurrency from one address to
another, and then you can load them
across onto an internet-connected
computer and that way your passwords are
never accessible from the internet. So
that’s supposed to give you more
security, and this is actually one of the
neat things about cryptocurrencies: that
you can actually generate a transaction
offline and then submit it onto the
Internet, onto the peer-to-peer network,
when you want it to be acted on. So this
is kind
a bit like the hardware wallet is
creating checks for you and signing them
and then printing them out and then you
can hand them over, but the actual
mechanism of creating the check is held
within the device and in particular the
ability to sign the check is within the
device, and it’s not connected to the
internet so that should make it much
much more secure. So there we go – a
quick review of the different kinds of
cryptocurrency wallets there are, and
once again a reminder: a wallet is not a
wallet in the traditional sense, a wallet
is basically a system for storing your
private keys to your cryptocurrency
addresses in (hopefully) a safe and secure
manner, and that really is the central
point to all of this – you want to keep
these private keys as private and secure
as you possibly can. I hope you
found that an interesting walk-through the
different kinds of wallets, and I’ll see
you in the next video soon. Bye for now!

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