Bitcoin transfers are sent to and from what we know as Bitcoin electronic wallets (or BTC Wallets). They are digitally signed to guarantee the security of the shipment of assets. Therefore, anyone can know about a transaction made by searching with the corresponding code through the Blockchain.
Cryptocurrency wallets or purses are the bridge that enables us to manage our cryptocurrencies. They are pieces of software or hardware with which we can receive and send through the blockchain network of each cryptocurrency.
One of the vital elements in the crypto and blockchain technology world are wallets. The use of these tools is essential when managing our cryptocurrencies. That is why choosing an adequate one that meets our needs is as important as having one. For this reason, in this article, we will share the most essential and fundamental information that you should know to understand what wallets are and how they work. Also, we advise you to check out livebitcoinnews.com if you want to learn more about the subject and choose the best option.
The term wallet refers to a virtual wallet, and that’s how we manage our crypto assets. It is a software or hardware designed exclusively to stock and control the public and private keys of our cryptocurrencies.
How do cryptocurrency wallets work?
As we already mentioned, cryptocurrency wallets or purses represent indispensable elements when it comes to operating with them. They allow us to send or receive payments in crypto assets.
Unlike the traditional financial system, Bitcoin is a fully digital currency that doesn’t exist in the physical world and that works based on crypto. Therefore, the wallets` design is of vital importance to be able to operate and manage our funds. Even though the term wallet sounds similar to the one that we use to store our real money, the truth is that in cryptocurrencies, what is stored in them are public and private keys.
Cryptocurrencies function as records of transactions. They are contained within a blockchain, which is operated by interconnected nodes around the world. So, both public keys and private ones are what give us the ownership and right over the cryptocurrencies transferred to a particular address. Let’s take a look at this more closely:
- The public key works in a similar way as a bank account number. It can be delivered to anyone without making a risk that they will withdraw our funds. With the public key, addresses are generated to receive, consult, and view the status of our funds.
- The private key works as a PIN or password, and we should not reveal it to anyone. That is because it gives us the right to spend the cryptocurrencies contained in the address. Thus, the owner should have full control over his private keys.
Wallets or purses use advanced blockchain encryption techniques to grant and guarantee total security to users. In this way, the wallet can save, send, and receive cryptocurrencies without more significant risk.
When configuring a wallet, the first thing that needs to be done is creating a private key. That is performed using a secure algorithm. The first option for doing so is the ECDSA algorithm, with the use of the elliptic curve secp256k1. And the second option is the EdDSA algorithm. In either case, the main aim is to provide a high level of security. That is because both methods can enable the creation of almost infinite combinations with a high degree of difficulty. That makes them practically impossible to guess or to be broken into.
After the private key, the public one is created, and it is mathematically related to the first one. There, the addresses where we can receive cryptocurrencies are generated. However, it is essential to note that although the public key is related to the private one, the reverse process cannot be done. That is because the algorithm used for creation works one-way only.
There are also deterministic wallets (HD wallets) that, when configured for the first time, generate a seed. All the keys and addresses are generated from there. Later it will serve us to restore, recover the wallet, and our funds in case of damage or loss of equipment. These seeds are a kind of code in mnemonic words, generally in English. To provide greater ease when making backup copies.
As a curious fact, it is essential to keep in mind that the public and private keys generated in a wallet are not related to the cryptocurrency protocol. If that is the case, you should instead take shelter within the hardware that operates them and never leave the device. However, the high level of security will depend on the type of wallet being used. There are hardware wallets, paper wallets, light wallets, and software wallets for desktop, tablet, or smartphone.
Utility and importance
No entity or body controls bitcoin and other cryptocurrency systems since they are entirely decentralized. That is why wallets play a crucial role in this ecosystem. They constitute a part of the necessary infrastructure that allows us to operate with cryptocurrencies. Through them, we can keep track and check our balances, in addition to the operations carried out and received. They also allow us to operate our funds, having complete control over them. We do not need the permission or authorization of any third party to carry out an operation.
Besides providing us with security to carry out our operations, wallets also allow us to sign transactions, and there is no need that private keys leave the device during the process. When we send something to a person, we are transmitting a value that has a form of a transaction. Therefore, we are transferring ownership of a certain amount of money to that person. For the network to confirm the transfer and the recipient can use the funds, a digital signature is required. Thus it will be verified that the person who operates owns the funds and not a third party.