Blockchain and crypto are built on a powerful promise: immutable security. But if you want to buy, trade, earn, or truly interact with the world of Web3, that security is only as strong as your wallet. 

Unlike a traditional wallet, a web3 wallet goes beyond just acting as a bank account – it’s your digital passport in the web3 ecosystem.

In this article, you’ll learn exactly how crypto wallets work, why owning one is essential, and how to choose the right type of wallet for you.

But first, what is a crypto wallet? 

TL;DR Definition

Every coin has a public address associated with it, and only the holder of the corresponding private key can control those assets. A crypto wallet is the software or hardware tool that stores and secures these confidential private keys. These keys are your proof of asset ownership, allowing you to send, receive, and authorize transactions. Crucially, crypto wallets do not hold currency; the assets remain secured on the blockchain. Unlike traditional bank accounts, this makes the crypto wallet fully self-managed, placing you in complete control of your assets instead of relying on intermediaries.

How Do Crypto Wallets Work?

Key Generation: 

Crypto wallets are cryptographically generated with a pair of keys: Public and Private key. 

Transactions: 

Unlike a traditional wallet which stores your bank notes and coins, crypto wallets don’t actually hold your assets. Instead, your holdings live on the blockchain, but can only be accessed using a private key. Private keys are used to sign your transactions and confirm your ownership without exposing your private keys. 

Broadcast: 

Once the transaction has been signed, the transaction is broadcasted to the blockchain network allowing for validators to verify and record it on the public ledger. Note that, like all blockchain transactions, it is irreversible and immutable. 

Public Address vs. Private Key vs. Seed Phrase

Wallets have three key components that safeguards your assets: Public Address, Private Key, and Seed Phrase. As a beginner, these might sound confusing especially with other Web3 jargons. 

A good analogy is imagining your wallet as a house. To locate your house, it must have an address (Public Address). To access and enter your house, you need the keys (Private Key) to the door. Let’s be honest, sometimes we forget to bring our key once in a while. Some people hide a spare key under the mat or in a garden pot. Imagine your Seed Phrase as a recovery key.  

• Public Address: Derived mathematically from the private key, the public address is designed to be shared openly, acting as the network destination for receiving funds, much like a bank account number. Because it’s public, you can use blockchain scanners like Etherscan to instantly track its balance and full transaction history.
• Private Key: This is a unique and complex alphanumeric code that serves as proof of ownership over the assets tied to the corresponding public address. Note that anyone who possesses it, gains absolute control over the wallet including the assets. It is used to digitally sign transactions, verifying their legitimacy without ever being exposed to the public network.   
• Seed Phrase: Often a sequence of 12 to 24 words, the seed phrase (or Recovery Phrase) serves as a back up recovery tool. Although it’s a lot simpler than a Private Key, it’s best practice to store it securely offline. Just like the private key, anyone who possesses it, gains absolute control over the wallet.

What “Signing a Transaction” Means (Approve + Broadcast)

When initiating a transfer, your wallet executes a critical process known as signing the transaction:

Approval (Signing): 

The private key is utilised securely within the wallet environment to generate a unique digital signature. This signature is a cryptographic authorization that confirms the transaction originated from the legitimate asset owner. The private key itself is never transmitted over the network.   

Broadcast: 

Once signed, the transaction is broadcast to the peer-to-peer network for verification. Network validators or miners receive the request, verify the digital signature, check for sufficient funds, and compete to include the valid transaction into the next block of the blockchain.   

Network Selection and Fees/Gas

Before broadcasting, users must select the correct blockchain network (e.g., Ethereum, Solana). Selecting the wrong network can lead to the permanent loss of your funds. 

Since blockchains are secured by validators, every transaction comes with a fee to compensate them for securing the network. This cost, called Gas Fees or Transaction Fees, is dedicated from your balance alongside the amount sent. 

Gas Fees are typically calculated based on the computational work required for a transaction and the current network demand. 

For example, Ethereum Gas Fee formula is: Gas Units Used × (Base Fee + Priority Fee).

Wallet Types

Crypto wallet solutions are categorized based on two key security dimensions: who controls the private keys and whether the keys are stored online.

Custodial vs. Self-Custody

This distinction defines financial ownership and sovereignty:

Wallet Type	Key Ownership	Pros	Cons
Self-Custody (Non-Custodial)	User holds all private keys.	Complete financial sovereignty; eliminates third-party risk (hacks, insolvency).	User bears full responsibility for key security; loss of seed phrase means permanent loss of assets.
Custodial	A third party (e.g., CEX) manages and holds the private keys on the user’s behalf.	High convenience, customer support, easy fiat conversion, and fast trading access.	Requires trust in the custodian; assets are vulnerable to exchange hacks, insolvency, or regulatory seizure.

  

Hot vs. Cold

This distinction relates to the technological environment where the private keys are stored:

Wallet Type	Connection Status	Key Storage & Use Case	Security Profile
Hot Wallets	Always connected to the internet.	Software (mobile apps, browser extensions) used for daily transactions and active Web3 interaction.	Vulnerable to online threats (malware, remote hacking).
Cold Wallets	Kept entirely offline (air-gapped).	Physical hardware devices (e.g., Ledger, Trezor) used for long-term storage of significant wealth.	Immune to online cyber-attacks; maximum security achieved at the expense of transaction speed.

  

Choosing a Wallet: 3 Quick Scenarios

Note that wallets are a one-size-fits-all product, it comes down to the user’s activities and needs. We’ve broken down three different usages and recommended the most appropriate wallet type.   

New Users with Low Balances

As a new user, learning the basics is the most important objective. You’re just starting out, exploring the decentralised ecosystem and executing basic transactions. 

Recommendation: choosing a user-friendly self-custody hot wallet, such as the Coinbase Wallet or Kraken Wallet, is a great starting point. These wallets are simple to set up and easy to navigate.

Larger Long-Term Holdings 

Long-term holders are looking to safeguard a large balance of their assets, security is top of mind. Ideally you’d want a wallet that is kept entirely offline to be less vulnerable to online threats. Recommendation: choose a hardware wallet for cold storage, such as Ledger or Trezor. Hardware wallets are engineered to store private keys offline in a secure element, providing the highest level of security against online attacks.  

Active Web3 User

If you’re an active web3 user looking to interact with different protocols and transact across various chains, you’d want to find the sweet spot between speed, versatility, and security. 

Recommendation: Browser extension wallet paired with a hardware wallet. A browser wallet, such as Phantom or Metamask, is a great gateway to most networks and can easily connect to a wide spread of protocols. To further bolster your wallet’s security, pairing it with a hardware wallet adds a layer of verification. This is because you are physically required to authorize every transaction, ensuring your private keys remain offline. 

 

Set-Up & First Transaction

Securing the Seed Phrase

The single most important step in setting up a non-custodial wallet is securing the unique seed phrase. Seed phrases are most commonly 12 or 24 words long. Do not lose or give this seed phrase out as it acts as a master key, allowing you to recover your wallet and access your funds. Instead, immediately document this down somewhere safe. 

Ironically, the best method to protect your seed phrase is by old school methods such as documenting it on a physical paper or metal to store offline. It’s best practice to never save the seed phrase on any internet-connected device, including your computer, mobile phone, or cloud services. Exposure online is the fastest route to asset compromise. 

Executing Your First Transaction

1. Enter Details: Input the recipient’s public address and the amount to be sent.
2. Confirm: Please verify that the address and network are selected correctly. Sending it to the wrong address or network will lead to permanent loss of funds. It’s best practice to send over a small amount as a ‘test’ transaction before sending over large sums.
3. Fee Calculation: The wallet calculates the required network fee (Gas Fee) based on network congestion and computational demand.
4. Signing and Verification: You digitally sign the transaction using your private key to authorize the transfer. The total amount deducted will be the sent value plus the network fee.   
5. Track: Verify that your transaction has been executed successfully by checking your history page or a blockchain explorer with your transaction hash. Each transaction is given a unique identifier called a ‘hash’.

Security Basics

For managing a digital currency wallet, security protocols are non-negotiable. Especially in this digital age, cyber attacks are evolving at a fast pace. Here are a few tips we recommend adhering to:

• Never Share the Seed Phrase: No legitimate support team, DApp, or project will ever ask for your 12-to-24-word recovery phrase. Sharing it is equivalent to handing over your entire portfolio.   
• Test Recovery: Before storing significant value, intentionally wipe your wallet and successfully restore it using only your backed-up seed phrase. This confirms your recovery method works. 
• Beware of Phishing: Self-custody users are highly susceptible to social engineering and phishing attacks. Please always verify the link or platform you’re connecting to. 

Custodial Exchange Account vs Wallet

The choice between an exchange account and a self-custody wallet reflects a fundamental divergence in risk:

• Not Your Keys, Not Your Coins: When using a Centralized Exchange (CEX), you entrust the platform with your private keys. This makes your assets vulnerable to technical infrastructure breaches, hacks, regulatory action, or exchange insolvency.   
• Self-Custody Wallet Control: By holding the keys, you eliminate third-party counterparty risks and have direct control over your private keys. However, this shifts the risk entirely to the user. You’ll be responsible for securing your wallet.    

What You Can Do With a Wallet

A self-custody wallet is seen as a user’s identity and gateway to the Web3 ecosystem:

1. Interact with Decentralized Applications (DApps): By connecting the wallet, users gain permissionless access to DApps such as Decentralised Exchanges, lending protocols, decentralised games, and more.
2. Prove Identity: Wallets can be used as a form of identity and login such as participating in a DAO’s (decentralised autonomous oragnisation) governance activities.  
3. Earn Passive Income (Staking): Wallets facilitate staking and yield farming, allowing users to lock up tokens to support network operations and earn rewards, acting as a decentralized version of earning dividends.   
4. Manage Digital Identity and Assets (NFTs): Wallets are used to prove ownership and manage Non-Fungible Tokens (NFTs), digital art, and collectibles. They also enable emerging utilities like NFT staking, integrating digital collectibles into the broader DeFi ecosystem.  

 

Frequently Asked Questions (FAQs)

Do wallets store crypto or keys?

Wallets store keys. The digital currency itself exists as data secured and recorded perpetually on the blockchain. The key simply provides the cryptographic authority to move the funds associated with a public address.   

Hot vs cold: which is safer for beginners?

Cold storage (hardware wallets) is objectively safer for long-term security. However, beginners should start with a reliable, user-friendly hot wallet to practice transactions with a small, acceptable amount of capital before moving significant holdings to cold storage.   

Custodial vs self-custody: which should I choose?

Choose self-custody for any substantial or long-term holdings to maintain full financial sovereignty and eliminate third-party risk. Only use a custodial account for small amounts needed for immediate liquidity (e.g., active trading or fiat conversions).   

What if I lose my seed phrase?

If you lose your seed phrase and your device becomes inaccessible, the funds associated with that crypto wallet are lost irreversibly. There is no central customer support or service that can recover lost keys or seed phrases.   

Can I use one wallet across multiple blockchains?

Yes, most modern software wallets (hot wallets) are multi-chain compatible, especially with networks built on the Ethereum Virtual Machine (EVM). However, highly specialized chains may still require dedicated wallet software.   

Are mobile wallets safe?

Mobile wallets are software (hot) wallets. They are safe for active, small balances, but they carry inherent risks, as the private keys reside on an internet-connected device. They should not be used for storing large amounts of capital.   

What’s the difference between an exchange account and a wallet?

An exchange account is a custodial relationship where the exchange holds the private keys and controls the assets on your behalf, requiring you to trust them. A self-custody digital currency wallet gives you direct ownership and control of the keys, removing the need for a trusted intermediary.