What Is a Digital Wallet?

A digital wallet is a computer program, software application, or electronic device, that performs banking services and eliminates the need of using debit and credit cards to make electronic transactions like buying, selling, and payment of bills. A digital wallet securely stores individual or business credit card information, transaction history, account balances, and passwords. Individuals and businesses can simply log in to their mobile device's digital wallet and link their credit card or debit card information to the app and perform banking transactions safely. Individuals and businesses can make direct transfers from their digital wallets as well as purchases and sales on e-commerce websites and in physical stores.

Examples of famous digital wallets are:

Cash App
Samsung Pay
Alipay
Apple Pay
Google Pay
Venmo
Zelle
Vodafone M-Pesa
Dwolla
Walmart Pay

Benefits of Digital Wallets

Digital wallets are applications on mobile devices, thus portable and very easy to use.

Digital wallets allow users to shop and pay bills using their phones or laptops via transfer, eliminating the need to carry credit or debit cards to shop, thus, preventing credit and debit card fraud.
Digital wallets make transfers easily to friends, family, and people regardless of their geographical location.
Digital wallets help to connect the banked and unbanked, it connects individuals and businesses in rural and urban areas.

Cryptocurrency Wallets

A cryptocurrency wallet is an application that functions as a digital wallet for your cryptocurrency, cryptocurrency wallets are used to store cryptocurrency. A cryptocurrency wallet is used to communicate with a blockchain network. As a cryptocurrency novice, cryptocurrency wallet security is a priority in cryptocurrency and it is essential to understand the key difference between custodial and non-custodial crypto wallets and which should be used. The security of cryptocurrency wallets differs as the wallets differ in two broad categories.

There are two major types of cryptocurrency wallets, custodial wallets, and non-custodial wallets.

Custodial Wallets

A Custodial Wallet is a digital wallet in which a third party manages your cryptocurrency private keys. The third-party has complete control of your cryptocurrency, while the user only needs to grant permission to send or receive cryptocurrencies. A centralized cryptocurrency exchange is an example of a custodial wallet (CEX).

Centralized wallets are cryptocurrency exchange wallets that store the cryptocurrency of the users. The security of centralized wallets relies on the security of the centralized exchange; there are instances where exchanges are hacked and users lose their cryptocurrencies. Centralized exchanges are also regulated by government policies and can seize a user's assets if it's termed fraudulent. In a centralized exchange, it is compulsory for users to complete their KYC (Know-Your-Customer). User's transactions are monitored for fraud cases and money laundering. In a custodial wallet, users don’t have complete control over their wallet, it is influenced by government policies and regulations just like digital wallets like Cash App and Venmo. A centralized exchange wallet is known as a custodial wallet, the security of your wallet depends on the centralized exchange’s security. Examples of custodial wallets are CoinEx, Coinbase, Binance exchange wallets, etc. Decentralized wallets are known as non-custodial wallets.

Non Custodial Wallets

Non Custodial wallets are cryptocurrency wallets that give the owner complete control over their cryptocurrency assets. Non-custodial wallets are known to be fully decentralized. When a user creates a non-custodial wallet, a private key and public key are generated for them. The private key is the password to the non-custodial wallet, the security of the wallet depends on how securely users keep their private key. The private key in a non-custodial wallet can be in a form of a length of strings of alphanumeric characters or in a form of a 12 or 24-seed phrase. These phrases or alpha-numeric characters are synchronized to the user blockchain account and are used to sign in to their accounts on various non-custodial wallets. Examples of non-custodial wallets are Trust Wallet, MetaMask, Ledger Nano X, Trezor One, Exodus, etc. Some centralized exchanges have now created decentralized non-custodial wallet applications because a lot of cryptocurrency users prefer to have complete control over their assets as that’s the essence of cryptocurrency in the first place.

The non-custodial wallet comes with its risks as a user tends to lose all cryptocurrencies in their wallet when they lose access to their private key or their private key is hacked. When users save their private keys on google drive or iPhone clouds, hackers can hack their drives or iPhone cloud accounts and gain access to their private keys and hack their non-custodial wallets. If users save their private keys physically (on paper), they also tend to lose them to theft, misplacing, or loss due to natural disasters and other causes. Private key safety is one of the reasons users go for custodial wallets instead of non-custodial wallets. Custodial and non-custodial wallets have their risks, they are exchanges that have been hacked and hackers got away with users' cryptocurrencies, big exchanges like Bitmart, Crypto.com, etc.

Non-custodial wallets are divided into two types:

Software Wallets (Hot Wallet)
Hardware Wallets (Cold Wallet)

1. Software Wallets (Hot Wallet)

Software wallets, also known as Hot Wallets are digital non-custodial wallets that are used to store cryptocurrency. Users have complete control of this wallet using their private key, but users also tend to lose access to their wallets when they lose access to their private key or lose their private keys to hackers. Examples of software wallets are Trust Wallet, MetaMask, Phantom, Keplr, Lobstr, etc. A wallet private key is generated by the blockchain and synchronized to the blockchain. Users can use these generated private keys and login into different digital non-custodial wallet applications to have access to their cryptocurrencies and perform transactions.

2. Hardware Wallets (Cold Wallet)

Hardware wallets, also known as Cold Wallets are physical non-custodial wallets that are used to store cryptocurrency. Users have complete control of this wallet using this physical device. Hardware wallets are not vulnerable to private key frauds on the internet, but users can lose access to their wallets if they lose the physical wallet drive. The hardware wallet is the safest cryptocurrency wallet, it is safer than the software wallet and custodial wallet as hardware wallet users have complete control over their cryptocurrency and are not vulnerable to private key fraud. Examples of hardware wallets are Trezor Model, Ledger Nano S, Ledger Nano X, etc.

Summary

In summary, cryptocurrency wallet security is a priority in cryptocurrency and it is essential to understand the types and make a choice. Choosing a cryptocurrency wallet is up to you, there as factors to consider in this article. If you trust a cryptocurrency exchange to take custody of your private keys, you can go for custodial wallets like CoinEx, Binance, Coinbase, etc. They are advantages of a custodial wallet, a custodial wallet gives cryptocurrency newbies web2.0 (digital fintech wallets like Cash app, Venmo) experience. A user doesn’t have to worry about losing their private keys to scammers online as the safety of their cryptocurrency assets is guaranteed by these exchanges and insurance is also guaranteed when they are a hack on these exchanges. Users can just simply keep their login information securely like other applications and perform 2FA (Two-Factor-Authentication) to make their accounts more secure and less vulnerable to hacks.

While users who want to keep their assets private and have complete control over their assets can go for non-custodial wallets and choose either software wallets (hot wallet) or hardware wallets (cold wallet). It’s important to know the security of non-custodial wallet users is up to you and it’s advised to keep your private key securely and save it physically and in an encrypted way. It is also encouraged to avoid saving your private keys on Google Drive, iPhone clouds, and cloud data services.

What Is a Digital Wallet and Cryptocurrency Wallet?