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Today, I'm here to dispel a widespread misconception that is preventing many people from truly understanding how a blockchain works. The misconception is:
"A cryptocurrency wallet actually contains your cryptocurrencies."
False. It's a conceptual error stemming from a poorly chosen term. Unless you use a centralized exchange like Coinbase or Binance, in which case you're relinquishing control of your money to a third party, your cryptocurrencies reside in addresses (accounts) native to the blockchain that only the holder of its private key can access. A wallet is something else; let me explain.
Let's start from the beginning. Transactions conducted on a blockchain are executed by addresses, which you can think of as "accounts" that store, send, and receive money. A blockchain is a distributed ledger, and addresses are its individual entries or records. Behind an address can be a person, an organization, or a bot.
These addresses have two associated keys: the private key and the public key. The private key is a long and random alphanumeric code whose decryption time (for current computers) is larger than several times the age of the universe. The public key is derived from the private key and is primarily used to confirm transactions initiated by the private key itself. Finally, the address, derived from the public key, functions as an "account number"; the alphanumeric code you send to your roommate to get your half of the rent.
Private Key → Public Key → Address
The importance of the private key is clear. It's what grants you the power to conduct transactions from an address, the key to accessing your cryptocurrencies. If you lose (or get robbed of) the private key, you lose your crypto. It's highly recommended, almost obligatory, to write your private key down on paper with a pencil.
Crypto-wallets aren't wallets because they don't contain cryptocurrencies
They are tools for storing and managing private keys, as well as user interfaces to seamlessly interact with the blockchain. Wallets are a friendly way to present and manage an address, because without them, we'd have to use low-level tools and write some code to execute any transaction.
So, your real wallet is an address on the blockchain, your private key is a key that gives you control over that address, and your “wallet¨ is a tool to store and manage that key; a more comfortable way to carry your key and use it. A keychain.
In broad terms, there are two types of wallets:
Software wallets: these are applications that you can install on your computer or mobile device, which encrypt the private key of your address using a conventional password and store it on the same device or browser you're using. They are typically used as a browser extension and can connect you to any decentralized finance application. The most famous one (on Ethereum) is Metamask.
Hardware wallets: these are physical devices typically resembling a USB drive dedicated exclusively to storing your private key encrypted offline on that device itself. They are more secure than software wallets because they aren't connected to the internet, and therefore, more immune to hacking. The most famous one is Ledger.
And what if you forget the password to your wallet? As long as you keep your private key, nothing happens. That's why they are not wallets. If I leave my wallet on the subway and no kind soul finds it, I lose the bills inside. With the so-called "crypto wallets," that's not the case.
Another good way to understand that a wallet is like a keychain (besides experiencing it) is the fact that a person can have a single address (account), with its corresponding private key, and different wallets (keychains with copies of that key). For example, I have a specific address that I use in my browser with the Metamask wallet, and also physically with a Ledger. Same address, two wallets.
Capisce?
But the ship has already sailed. Wallets will remain.
Despite this nomenclature misstep, we have absolutely no intention of changing an industry standard. All we seek is for our readers and future users to understand that wallets like Metamask, Ledger, and soon Fungi, don't have the custody of their money.
Because... Not your keys, not your money.
In the next Microdosis, we'll explain what the future holds for wallets and how Fungi will play that game. But in the meantime:
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