Crypto Wallets

In principle, all cryptocurrencies are stored in so-called “wallets”. These can exist on your computer, your phone, a specialized piece of hardware, a piece of paper or simply in your memory – yes, really. In principle, wallets can be compared to traditional wallets or bank accounts: In a sense, they contain the amount of (crypto) currencies that belong to his address, even if these are only virtual.

Wallets with public and private keys

Setting up a wallet and using it to send or receive payments is very simple, but extreme care must always be taken with regard to security. The public-key encryption procedure forms the technical basis for the security of wallets. Each wallet always consists of a secret key (“private key“) and a public key (“public key“).

The public key can be accessed by anyone and is comparable to an account number or IBAN of the Wallet. It is therefore used to receive cryptocurrencies.

The secret key, however, must always be kept secret and it is technically practically impossible to calculate it from its public key partner. It is therefore used to send cryptocurrencies and signs every transaction you make. This key is therefore ultimately used to verify the Wallet’s ownership: if you lose access to a Wallet, the secret key is the only way to reliably regain access to the coins it contains.

Without the corresponding secret key, a public key and thus the wallet becomes a bottomless pit, since the account balance can be checked and new coins can be deposited, but the coins are not available. The coins of a wallet are simply lost without the appropriate private key. Therefore, both the public and private keys should always be stored/backed up together in a secure place (ideally offline) and protected from unauthorized access (e.g. on a hard disk or USB stick).

Deterministic Wallets (Seeds)

Some wallets also work with “seeds” – a series of seemingly random words as a kind of memory aid. In reality, however, these seeds are the human-readable form of a root key. An exact sequence of exact words can thus always be converted algorithmically to an identical key. However, the resulting root key does not function as an alternative to the two keys described above, but rather serves much more to generate, derive or restore them.

Wallets using such seeds are commonly referred to as “deterministic”. This makes it theoretically possible to store a wallet only in one’s own memory by memorizing the seed, since the private key of each address that has ever been generated can be calculated from the root key. And this root key can in turn be calculated by the seed.