Blockchain has been introduced since 2008, and the transaction of cryptocurrencies is also taking place through it since then. However, these transactions are not standalone and need to be managed by very efficient, secure, and reliable blockchain wallets. As the value of cryptocurrencies is skyrocketing, the demand for blockchain wallets has also shot up. Millions of users are already making use of wallets for making transactions of digital currencies. The intuitive interface of these wallets has a compound functioning at the backend, and many people are interested in knowing the workflow of these blockchain powered wallets, the safety implications of the transactions made using these wallets, and the process and location of storage of their digital currencies, much more. So, let’s dig in and find out more about the blockchain wallet and its working to gain insights on the different aspects related to it.
What exactly are blockchain wallets?
A blockchain wallet, or rather a cryptocurrency wallet, is a software program that facilitates the digital currency or asset transactions made by the users and allows them to check their balance. Users who deal with cryptocurrencies such as Bitcoin, Ethereum, Ripple, Carnado, Dash, Auroracoin, Litecoin, etc., thus, need to use a blockchain wallet of any type. Unlike traditional wallets, these wallets do not save cryptocurrencies, rather they maintain records of all the transactions like purchase, sale, exchange, etc.
A blockchain wallet is based on encrypting and saving the transactions in the cryptocurrency wallet store using a private and public key. Both public and private keys are non-identical pairs of large numbers, of which the public key can be shared with anyone, while the private key is kept secret. Both these keys work based on the lock and key principle where the private key acts like the lock and the public key is the key to this lock. The number of people having these keys does not matter as they can open the lock only if the key is right for it, i.e., the matching of public and private keys is needed for decrypting the encrypted code. This ascertains the security of cryptocurrency transactions at the backdrop as the users can visualize the value of digital assets (Bitcoins, ICO tokens, etc.) in their wallet only if the public and private keys used in the transaction match. Moreover, in order to authenticate the transaction, there is interaction with multiple blockchains and the users can buy or sell one or many cryptocurrencies.
The whole process can be further explained in the following steps:
#1: Creation of your wallet creates a master seed
Whenever a user creates a blockchain wallet, a unique master seed is created that is the nucleus of this specific user wallet. This master seed can be used to derive every individual bitcoin address that may be used by the user to transfer and request bitcoins.
#2: User side encryption means that only the user has access to their wallet
The wallet does not store any bitcoins of the user, rather it provides them the software they need for storing the bitcoins themselves. The user’s wallet is encrypted on the user’s device with a personal password. This password acts like your decryption key that can lock and unlock the user wallet and allows access to it. The blockchain wallet neither knows nor stores the user password and only the users can unlock and decrypt their wallet.
#3: The wallet servers maintain a backup of the user wallet
The wallet servers automatically maintain the backup of the user’s encrypted wallet. Safety of user wallet is uncompromised as another security layer is added to the user wallet by the wallet servers that encrypt the wallet a second time. This allows safe and secure access to the blockchain wallet from any or all different devices the user wants to use.
#4: Users can easily decrypt their wallet
When the user accesses their wallet with their Wallet ID (a unique identifier specific to user wallet) and password, user’s browser uses the blockchain wallet API and downloads the encrypted wallet backup, before safely decrypting it on the user’s device. Some blockchain wallets can also be accessed on user’s mobile device through the iPhone and Android apps.
#5: User recovery phrase makes the blockchain wallet failsafe
The master seed is encoded as a recovery phrase that is made up of 12 random words and acts as a backup that allows user to access their cryptocurrency regardless of the wallet software they are using. In case the user loses the password, or opts to use another wallet provider, they only need the recovery phrase to regain access to their funds.
How do transactions take place in blockchain wallets?
When someone sends digital currency to the wallet user, the new transaction is organized into a “block” that is visible online and is sent to everyone in the network. At the backend, the sender is actually assigning the receiver as the owner of that currency and sending it to the address of receiver’s blockchain wallet. The private key of the receiver’s wallet must match the public key assigned to the currency so that the receiver can spend it. After both keys are matched, that balance in the receiver’s wallet increases. The transaction is authenticated by everyone on the network and added to a chain of recorded transactions in a public ledger as a permanent, non-disputable, and transparent record of the whole process.
Thus, there is no exchange of currency, but the transaction is done, recorded on the blockchain, and seen in the wallet. There is no need of any mediator in the process and the people in the network who are validating the transaction can see data related to the code of the transaction and not the personal data of the user or receiver.
What are the different types of blockchain wallets?
To store and reflect cryptocurrency different types of blockchain wallets available include:
Software wallets: These are software applications downloaded on user’s device or accessed online. While the desktop software wallets cannot be accessed from anywhere and are a safe choice if your system is protected against virus attacks, online software wallets run using the cloud, can be used on any device like mobile, tablet, or even desktop, and are accessible from anywhere through a web browser, though a little unsafe.
Hardware wallets: These wallets are the most secure wallet option available as they store all currency offline. They store the private key of users on hardware devices like USB, are compatible with various web interfaces, and allow support to multiple cryptocurrencies. They need to be connected to any internet-enabled device for entering pin and confirmation.
Single or multi-currency wallet: With the increasing number of cryptocurrencies, the user may either opt for having a separate wallet for each currency or a single wallet to receive and transfer funds in different currencies. Multiple-currency wallet is an enhanced and flexible choice for the users.
The main purpose of a blockchain wallet is to simplify the exchange of cryptocurrency amongst users. The user can choose the type of wallet they want to use depending on the frequency and bulk of transactions. Thus, your company needs to understand the working of blockchain wallets thoroughly and develop customized blockchain wallets to meet the demands of the users.