Everyone who has had a thing or two to do with money must know about wallets. Now, this wouldn’t be quite an awkward thing to say if it was in the late 17th century when the use of paper money became widespread. Or the ‘80’s till the late 2000s when wallets were used much like a thing of class and style than just some personal portable leather storage vault for holding mints, coins, cards, tickets, and unimaginable things.
Today, no thanks to digital currencies, cashless economies, and card-less transfers, these bi-folded – and sometimes triple-folded portable storage accessories have become less and less desirable with over 60% reported usage decline by men over the last few years. They are now replaced with some new type of wallet – a Digital Wallet.
Unlike traditional wallets, which are used to hold fiat coins, paper currencies, and other unrelated random items like complimentary cards, small-sized pictures, receipts, old tickets, folded sticky notes, SIM tray pins, small jewelry, and a lot of other things – digital wallets are strictly designed to store and hold digital currencies for the owner.
Digital currencies are simply an umbrella term for all forms of currencies created with a digital structure and form that can be stored and exchanged only electronically. They cannot be held by hand or in physical wallets as in fiat currencies and are only accessible using digital electronic devices such as mobile phones or computers. Virtual currencies, cryptocurrency, and Central bank digital currency are the three basic types of digital currencies currently existing and in use.
Digital currencies can either be centralized in structure or decentralized. When centralized, they all lead back to a central electronic database owned, managed, and issued by a single company or individual. Centralized digital currencies are similar to paper currencies in that they give power of control and administration of large assets and finances to a single company or entity. On the other hand, decentralized digital currencies have no central banks or control and put the power to manage and control assets in the hand of the user. As will be discussed later, most crypto digital currencies are based on a decentralization technique that enables the owner to control their asset and manage its value.
The most popular, fastest-growing type of digital currency is cryptocurrency. Cryptocurrency, or crypto, for short, is a decentralized type of digital currency created through the complex process of cryptography, which functions as an asset, a medium of exchange, and more recently, a store of value. Popular cryptocurrencies in the market today are Bitcoin, Ethereum, Dash, Cardano, Ripple, etc.
Now, back to digital wallets. Digital wallets are designed to hold currencies that cannot be physically seen or touched; it is only fair that they too are designed not to be made of leather or fabric and not to be physically seen or touched. They exist only digitally, just like digital currencies. Think of them as a modern bank account. A modern bank account is not like a physical piggy bank where folds of customer’s currency notes can be slipped in and out as needed. They are simply a personalized digital ledger of all receipts and payment transactions by the customer. Most times, the physical cash a customer may imagine as sitting atop each other in a locked up vault has already been plowed into another investment opportunity by the bank in hopes of positive yields.
Why so important…What exactly is a Digital Wallet?
Digital Wallets are any form of digital interface, electronic device, or online transaction service that enables an electronic transfer of digital transactions. It performs a range of functions from facilitating cashless and contactless exchange to safely storing valuable documents and all transaction information of the user. Usually, digital wallets exist in the form of a mobile application or dedicated sign-up websites on the internet, but recently, many more providers of digital wallet services have versions that are application-based and compatible with over 3 billion global mobile phone users.
The major difference between Digital Wallets and Physical Wallets
Digital wallets are remarkably different from physical wallets in that they do not store paper money or coins like physical wallets but private and public keys. These keys are like a set of alphanumeric codes that acknowledge and record the transfer of ownership of digital assets from the sender to the receiver. The public key can be likened to a person’s bank account number while the private key is much more like the PIN code, personal to the account holder, that is used to authorize transactions.
Are there different types of Digital Wallets?
Yes, there are! There are two types of digital wallets based on structure: Non-crypto Digital wallets and Crypto Digital wallets. The three types of digital wallets out there are Closed Wallet, Semi-closed Wallet, and Open Wallet based on function.
Closed Digital Wallet
Generally, closed wallets are those types of wallets with transaction capacity limited to pre-specified boundaries by the issuer of the wallet. As the name implies, they are closed because they cannot be used for inter-wallet transactions and mostly perform only the role of holding or storing the digital currency. Wallets like Amazon Pay are a good description of closed wallets.
Semi-closed Digital Wallet
Semi-closed wallets are advanced closed wallets with fewer restrictions. They are built to enable the user to make external transactions but only within merchants and platforms authorized by the issuer. This simply means that semi-closed wallets have a definite limit to their acceptability, subject to the agreement between the receiving agent and the issuer of the wallet.
Open Digital wallet
This falls under those classes of wallets that are widely accepted as an instrument for exchange and allow a broad range of transactions for the user. Most traditional bank mobile applications and international payment facilitation platforms like PayPal have a closed wallet from which the customer can access a broad range of payment options.
Non-Crypto Digital Wallet
Based on structure, these are all kinds of wallets that do not operate using blockchain technology. They are mostly the kind of wallets issued by financial service provider companies like PayPal, Venmo, Mastercard, and other technology companies that incorporate a custom payment platform into their product like Apple Pay, Samsung Pay, etc.
Crypto Digital Wallet
As the name implies, Crypto digital wallets or simply crypto wallets are all types of e-wallets built-in form of software programs that have an underlying blockchain structure and are used to facilitate a wide range of cryptocurrency transactions, including storage and exchange. Some cryptocurrency projects offer in-house wallet options like Binance, Bitcoin, Monero, etc. Other third-party crypto digital wallet providers like Jaxx and Trust Wallet let the user store more than one type of cryptocurrency in them.
More focus on Crypto Wallets.
Digital wallets were not as fun and popular as they are known today. At least, not until the advent of blockchain technology and cryptocurrency that bought the need for crypto-wallets. Crypto wallets are more unique than other types of wallets. Unlike other wallets that are linked to and originate from centralized finance systems, they are decentralized in nature, making the user a personal ‘central bank’ for their wallet. Anybody looking to begin trading and investing in cryptocurrency must start by choosing the right digital crypto wallet to use.
They are built as tools for interacting with a blockchain network and consist of three different classifications: Software wallets, Hardware wallets, and paper wallets.
These are the basis for most crypto wallets created on the internet today. They are available in the form of software to be accessed on digital devices using internet connectivity. There are many different types and forms of soft wallets accessible on various interfaces, such as web, desktop, and mobile wallets.
All classes of wallets that are accessible only through a browser interface are web wallets. The range cuts across all forms of exchange and browser-based wallets that do not require the installation of any application or download of any file, and the user is expected to secure the account by generating a private password for the account. As a general rule of thumb for new crypto users, it is never advisable to store private keys in the wallet platform for funds security reasons. Some platforms offer some extra safety measures like multi-signature, multi-factor, anti-phishing, and withdrawal address management features, as some form of trusted protection for private keys.
The desktop wallet resides as a feature attached to the desktop of the user. It is a type of wallet that is downloaded and installed as software giving the user full access to features that are synchronized to the user’s desktop local storage. A password and private key are prompted for every attempt to open and run the software. The wallet can be accessed on another desktop device by providing the unique corresponding private key, and the wallet is forever lost in the event of a forgotten private key by the user. Users must equally ensure that their desktop devices are free from viruses, malware, and ransomware when using them for wallet transactions.
Mobile wallets are structured in a much similar pattern to the desktop wallet but are specifically adapted to suit smartphone devices such as Android or iOS devices. Most mobile- suitable wallets employ the use of QR codes to validate transactions and are convenient for daily transaction use. Trust Wallet, OKEx, and Roqqu are some of the types of mobile wallets available. As with all devices that run on software and are exposed to the internet, there is the risk of malicious attacks and malware infection, hence the need for proper encryption of the site. Also, users would benefit from backing up their sensitive data like private keys, in the case of loss, damage, or upgrade of the mobile device.
On the other hand, Hardware Wallets is a type of cold storage for physical devices like bank tokens that serve as wallets. These devices use an encrypted random number generator (RNG) to arbitrarily generate alphanumeric codes for public and private keys. All generated codes remain stored in the device, which makes it one of the secure ways of wallet transactions. Some web wallet providers add features that enable the synchronization of hardware wallets to the website. A great advantage of using Hardware wallets is the protection from malware, ransomware, and other online attacks that affect devices connected to the internet. The downside is that they make transactions less seamless and sometimes difficult to execute by way of the extra security.
Hardware wallets are suitable for large quantity buyers and HODlers (people who purchase and hold cryptocurrency for long periods) as they provide a safe way to remember and recover passwords in case of forgetfulness.
The last category is the paper wallet, which encrypts a wallet ID printed out on paper for scanning to access the information and complete transactions. The alphanumeric codes that constitute a paper wallet can equally be downloaded online and offline to ensure higher protection from external attacks.
The major downside to the use of paper wallets is the risk of exposure once wallet digits are printed out, the lack of divisibility in transfers. This means that a user cannot transfer a fragment of their digital coin asset without first transferring the total to a designated software wallet and then sending the desired quantity to the recipient. This process has been proven too cumbersome for the user seeing that the paper wallet is structured to be a one-time-use wallet to be generated every time a new transaction will be made.
The difference between hot wallets and cold wallets
Depending on the way they are structured to operate, all of the types of wallets mentioned above can be classified into these two categories – -hot or cold wallets.
Hot wallets are all types of wallets that maintain functionality by way of connecting to the internet. Upon creation of an account on an exchange platform like Binance, funds sent to the platform are stored on the platform’s hot wallet. Hot wallets gain the advantage of an easy set-up process, rapid and accessible transfer of funds which places them high up the pedestal as the top choice for regular traders.
Cold Wallets are the opposite of hot wallets. They are structured to function as separate storage devices detached from internet connectivity that uses a random figure generating technology to secure stored digital coins. Hardware wallets are an example of cold wallets. Cold storage is the preferred method of storage for users who hold large amounts of digital coins, are long-term investors, or a combination of both. The exchange platform, Binance also uses cold storage technology for stashing away a significant percentage of its total coins to protect them from hackers.
Some reservations about digital wallets
Despite the decline in traditional wallets, a greater percentage of global consumers still do not see the need to transition into a fully digital mode of exchange. This is because of a few issues such as:
Issues of trust
Armed with the notion that nothing that exists online is 100% safe and secure, a greater number of world populations still express a reprehension towards the growing trend of storing up a significant number of assets on the internet. Cyber attacks, phishing, hacking and spamming operations are just some of the issues these set of people are concerned about.
Availability and Acceptability concerns
Despite the global cashless economy drive and the growing acceptance of digital payment options by some countries of the world, there is still a lot of ground to cover when it comes to transacting using digital payment options. There are still rural areas in many places of the world that do not have adequate access to steady electricity or the internet. Most digital wallets depend on both elements to function is a glaring example of its limit. Furthermore, a large number of local stores still exist that d did not accept such payment methods just yet.
Fixing what’s not broken
Parts of the people still reluctant to switch to digital wallets believe that the traditional system is still very effective and functional, and as such, there is no need for the rush to quickly render it obsolete. Quite the contrary, digital wallets are built to complement traditional financial systems and not eliminate them.
Irrespective of the few reservations, Digital Wallets have been discovered to enhance security and reduce fraud compared to hardware devices like credit cards. By their nature, they save time and are proven to give users great convenience in doing transactions. They help track expenses and can be a source of bonus rewards, discounts, and cost savings. In the case of crypto wallets, they have become a source of asset investment to guard against currency fluctuation, which users can make interesting profits through trading and long-term holding.
In the near future, as the world continues to move towards a fully digitalized globe, many more improvements will be added to the world of digital currency to help make it safer, faster, reliable, accessible, and easier to use for new and existing users. The second best time to own a wallet would be then, the best, now.