So, Where Exactly is Crypto "Stored"?
🐣 And how do wallets keep it safe?
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🐣 Wallets: The Babysitters that Every Crypto Owner Needs
This week’s edition is on crypto wallets.
Actually, I’m dedicating this entire post to talk about what wallets are not.
Next week, I’ll do a “Wallets Part 2”, where I’ll talk about different types of wallets and how to get one.
🔑 Crypto Wallets Are Actually Keychains
People who own crypto tend to think it’s “stored” in a wallet.
When I say “wallet”, I’m not talking about ^ these ones.1
I’m talking about wallets used for cryptocurrencies, like Coinbase Wallet, MetaMask, and the hundreds of others…2
Unlike leather wallets, crypto wallets don’t store any currencies.3 They’re pieces of software or hardware storing something else: “keys”.
Keys are just long random numbers. There are two types we care about: public keys and private keys.
A public key is like your bank account number. It’s your “public” address through which you send and receive cryptocurrencies.
A private key like the bank account’s password. It’s a private number that helps verify that you own the crypto in an account.
Here’s an example of a public key just so you understand how ugly they look — 0xAbA16998347105c48A87eb47367Af9761fb558BA(This is actually the public key for my account in case you ever want to tip me :)
Wallets don’t manage your crypto. They only manage your keys. It would actually be much more accurate to call them crypto keychains instead of wallets.
But why do keys need managing? It’s because anyone who knows your private key can spend all your crypto or send it to themselves.
Clearly, then, we need a good babysitter for our keys. Enter the crypto wallet…
🐣 Babysitting the Keys
If people were in charge of creating private keys, they’d choose something like 123456 or privatekey123.4
And if they had to store the keys safely, they’d write it down on their Notes app or a crumpled sticky note, which is unsafe and extremely easy to lose!
This is where wallets step in. They take charge of creating a secure private key and storing it safely.
Here’s how they do this:
Wallets come up with a random sequence of 12 words and ask you to write them down safely
They use this word sequence to generate long random numbers, a.k.a. our public and private keys
Finally, they store these keys on your mobile or browser or their own device, depending on the type of wallet
Your only job is to take care of the 12-word sequence. Anyone who knows it can “re-create” a wallet and its keys, which is why it’s also known as a recovery phrase.
Keep your recovery phrase safe. Here’s a short video from MetaMask on how you can do that:
👬🏼 A Crypto Wallet is Like Venmo’s Ugly Twin
(Not that I’m implying Venmo’s a beautiful app, but still.)
If you’re familiar with Venmo, you’d know that it doesn’t store any money on your phone or the app itself. It just shuffles people’s account ‘balances’.
Your ‘balance’ is just a number stored on a database somewhere in the world. And yet, even though you don't know where this database is and who has access to it, you trust Venmo.
You build that trust by repeatedly sending and receiving transactions on the app and thinking to yourself, "hmm...maybe I can trust this app to 'store’ my money".
Crypto wallets work in a similar way. They don't store your cryptocurrencies. They only make transactions for you.
The only big difference is that these transactions aren’t stored on Venmo’s database, but rather on a special public database (yes, I mean blockchains).
When you want to “Venmo” someone, you ask for their username or “handle”, open the app, type in their @handle, and press “Send”.
Wallets work the same way, except the handles are ugly long numbers disguised as “addresses”. To send someone crypto, you paste in their address, specify the amount, and press “Send”.5
So, the more you use a crypto wallet, the more you’ll realize that it’s actually just an uglier version of Venmo. And the primary reason everything’s uglier is that the design decisions prioritized security over ease-of-use.
Every interaction you make in our crypto world starts with your wallet – whether that’s exchanging currencies, buying an NFT, or even just checking your balance.
That’s why wallets are so cool.
Keep in mind that crypto wallets are only cool because they create and store your keys safely. They wouldn’t be as cool if you didn’t do your part.
So, if there’s one takeaway from this post, it’s this: keep your passwords and recovery phrases safe.
You never know, sometimes millions could be at stake.
Image Credits: RobbReport
In fact, cryptocurrencies aren’t “stored” anywhere. The only thing that’s “stored” is a record of accounts’ transactions, giving way to account 'balances’.
I based my guesses on NordPass’s list of the 200 Most Common Passwords.
