Learn / Lesson 8

How do wallets work?

A crypto wallet is not like a purse that holds coins. Your coins live on the blockchain. The wallet holds the secret keys that prove they are yours and let you send them.

Two keys, two jobs

Your address (from your public key) is like an account number. You can share it so people can send you crypto.

Your private key is like a password that approves sending. Anyone who has it can take your coins, so never share it.

The recovery phrase

Most wallets give you a recovery phrase, usually 12 or 24 words. It can rebuild your wallet if you lose your phone. Write it on paper and keep it somewhere safe and offline. Never type it into a website, and never give it to anyone. Treat anyone who asks for it as a scammer, even if they say they are support.

Types of wallet

• Hot wallets are apps or browser add-ons connected to the internet. They are convenient, but more exposed to hackers.
• Cold wallets are small devices that keep your keys offline. They are harder to attack and often used for larger amounts.
• Exchange accounts are held by a company that keeps the keys for you. It is easier, but you are trusting that company.
• Self-custody means you hold your own keys. You have full control, and full responsibility. If you lose the recovery phrase, nobody can get your coins back.

Keep in mind

Crypto transactions cannot be reversed. Check every address carefully, and consider sending a small test amount first. Be wary of anyone who contacts you offering help with your wallet.

What actually happens when you send

When you send crypto, your wallet builds a message that says "move this amount from my address to that address", then signs it with your private key. The signature proves the request came from you without revealing the key. The network checks the signature, adds the transaction to the blockchain and charges a small network fee. Once it is confirmed it cannot be reversed. The wallet only creates and signs the message. It does not hold the coins, which is why you can restore a wallet on a new phone using the recovery phrase.

Match the network

A wallet can hold addresses on many blockchains, and an address that looks valid on one may not work on another. Sending a coin over the wrong network can mean the funds do not arrive where you expect. Before sending, check which network the receiver is using, and send a small amount first if you are unsure.

Hardware wallets

Ethereum's security guide says a hardware wallet keeps private keys offline, so they never touch the internet, which protects you even if your computer is compromised. Buy one directly from the maker or an authorised seller. Be suspicious of a device that arrives with a recovery phrase already written on a card, or with a pre-set PIN: you should create your own phrase on the device yourself.

Choosing a wallet

Ethereum's wallet guide lists the main types as hardware, mobile, browser, extension and desktop wallets, and links to a tool for comparing them. A few questions help you choose:

• Do I hold the keys, or does a company?
• Does it support the coins and networks I need?
• Is it widely used and open to public review, with a history of fixing problems?
• How is it backed up, and how would I restore it?
• How much am I keeping in it, and does that match how much security I need?

One wallet or two?

Many people keep a small "spending" wallet on their phone for everyday use and testing new apps, and a separate wallet with stronger protection for the amount they intend to hold for a long time. This limits the damage if the everyday wallet connects to a bad site.

Reading what you sign

Ethereum's guide on smart contracts points out that raw transaction data is hard for people to read, which leads to "blind signing": approving something you do not understand. Before you confirm, check three things: what the app is asking permission to do, which token and amount it covers, and who it is for. If your wallet shows a plain-language summary, read it. If it shows nothing readable and you do not know the app, do not sign.

Backing up and passing on

Write down where your backup lives and who could find it if you could not, without leaving the phrase where a stranger could read it. A wallet nobody can open is as lost as a wallet that was stolen.

Common mistakes

• Downloading a wallet from an advert or a link in a message instead of the official source.
• Typing the recovery phrase into a website to "unlock" or "verify" the wallet.
• Using a wallet app with no backup of its recovery phrase.
• Sending a large first transaction without trying a small one.
• Confusing an exchange account with a wallet you control.

Try it yourself

No money is involved.

1. Open the wallet comparison page on ethereum.org and pick two wallet types. Note one strength and one weakness of each.
2. For each, write down who holds the keys and how you would restore it on a new device.
3. Decide which type fits an amount you could easily replace, and which fits an amount you could not.

Key terms

Wallet, address, public key, private key, recovery phrase, hot wallet, cold wallet, hardware wallet, self-custody, network fee.

Sources and credits

Wallet types, custody and recovery phrases: ethereum.org, Wallets. Hardware wallets and staying safe: ethereum.org, Stay safe. General information, not financial advice.

Module quiz

3 questions. Tap an answer to see if you are right and why. Get 2 right to complete the module.

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