Crypto wallets store digital assets not in physical form but by providing the necessary tools and infrastructure to interact with the blockchain, such as quickly sending, receiving, and managing cryptocurrencies. They prove ownership of digital assets and act as identifiers when their owners need to access or use them.
Many times, I’ve tried to seek universal, flexible crypto wallets, only to pay the price later when new Web3 projects emerged. The same wallets that claimed to offer multi-chain support, De-Fi and DApp compatibility, mobile and desktop access, hardware wallet integration, or self-custody fail to meet my needs, leaving me with no option but to open another wallet — which is more painful as I now have a new set of seed phrases to protect.
Not only is there a buzz around hot vs. cold wallets, but the topic remains an ongoing discussion, although we can all agree that a balance between both models offers the best security and convenience. When the title “Multi-party computation wallet for beginners” went live, it became clear that a follow-through was needed regarding types of wallet addresses.
The rapid development of the Web3 ecosystem is partially to blame, but there’s nothing like future-proof solutions. As such, the pain of setting up new wallets with more DApps coming to life is inevitable. In this article, we’ll spotlight the available types of wallet addresses, differentiate the hot and cold types of wallets, and close out with some of the best security practices for crypto wallets. Let’s dive in!
What is a Crypto Wallet Address?
Vital to any blockchain transaction, a wallet address is a distinctive identifier for which you can send or receive digital assets. A wallet address is available as a string of characters, which, in turn, identify you on the blockchain. Though an address is a set of string characters, the constituents are public and private keys, working in tandem to ensure security.
The blockchain defines public keys, making them accessible and shareable. It also pairs them with private keys for each wallet address, which gives the custodian power over the assets in the wallet. In addition to providing a digital identity, wallet addresses provide ownership of assets, transaction security, functionality, and compatibility. How so?
Functions of a Wallet Address
Private keys control the wallet address in digital asset ownership, so whoever holds the private keys for a certain address controls it. Practically, the most common example is in custodian solutions like wallets in centralized exchanges (CEXs). You’d think you own the address, but that’s not the case. On the blockchain, the exchange owns the crypto, only to allow the use of an account on their platform — the exchange controls your assets. This demonstrates the role wallet addresses play in the actual ownership of digital assets.
In the block production process, otherwise known as a stake pool operation, blockchain networks rely on nodes to process transactions. As an integral part of the process, wallet addresses provide nodes with the necessary information, after which blocks get securely created. Every transaction initiated requires wallet address verification to prove its authenticity. The transaction can proceed once the address is proven true and the required funds are avaialble.
Wallet addresses are the base for peer-to-peer transactions — their functionality. Sending assets on the blockchain requires a valid wallet address to which the funds are directed. No matter the blockchain network, part of the transaction process requires inputting the recipient’s address. The immutability of transactions commands that you be careful with wallet addresses to avoid losing funds. Unlike traditional finance, for instance, in banks, the charges and asset transfer time may vary as each participant directly accesses the same network through a wallet address.
Across the same network, wallet addresses are the same, while the opposite is true: they differ across different networks. One way to demonstrate this is to look at Ethereum and Cardano, where the former uses an account model and unspent transaction outputs (UTXO) for the latter. Such clarity shows that the wallet addresses differ based on their underlying blockchain network operation model. What types of wallet addresses do we have?
Types of Crypto Wallet Addresses
Technological progress shows us that, with time, the ever-evolving user needs in the Web3 space will constantly demand new wallets, each for its unique problem as a solution. For that, here are the available types of wallet addresses listed in no particular order:
- Standard Wallet Addresses — These are often the most common and used wallet addresses for storage, personal transactions, and cryptocurrency transfers. For your example, here is the WikiLeaks donation BTC address: 1DSWHiAW1iSFYVb86WQQUPn57iQ6W1DjGo. You can confirm it by pasting it into the search bar at Blockstream Explorer.
- Smart Contract Addresses — These addresses are packed into a smart contract and controlled by programmed logic rather than individuals. On Cardano, smart contracts deployed are associated with the correct smart contract addresses, for which they execute code upon a trigger, with no ability to send transactions independently. This is the foundation for which decentralized applications (DApps) and automated token swaps are built.
- Multi-Signature (Multi-Sig) Addresses — These addresses require authorization from two or more people to orchestrate a transaction. They are helpful when digital assets are shared among people or in the custody of a company. While they enhance security for users with complex needs, unlike standard addresses, they require more technical aptitude to set up and work with them. A good example is using a multi-sig account for payouts when running a stake pool.
- MPC (Multi-Party Computation) Wallet Addresses — These addresses ensure the security and efficiency of digital asset transfers. Multiple parties contribute to a problem without revealing their individual inputs to achieve high-level security — the private keys are split and shared among participants, in other words. By collaboratively signing transactions, MPC wallets are a good fit for institutional-grade security, exchanges, custodians, hedge funds, and cold/hot wallet management for large crypto firms.
- Staking & Delegation Addresses — These addresses are for staking funds in proof-of-stake (POS) networks like Cardano. In practice, the stake delegation requirements are a staking address registration and a delegation certificate. Use cases include participating in network validation to earn staking rewards and securing the proof-of-stake consensus algorithm. A good example is the wallet address for our Ada Pulse reporter from ATM StakePool. Use Cexplorer to check out.
- Exchange & Custodial Addresses — Examples are wallets from an exchange like Binance or a custodian like Coinbase, where users initiate transactions through platforms of their choice. People choose them because of the ease of recovery, when they lose passwords. Regarding their uses, these addresses are good for trading crypto on centralized platforms and institutional custody services. The only threat is that the exchanges or custodians hold the private keys, making them a lucrative target for hackers, and if acquired, you can lose crypto.
- Privacy & Shielded Addresses — Some wallets hide blockchain data, including transactions sent to them and asset holdings, rendering their operations invisible. These addresses keep your information private. If you want to protect your financial privacy, such wallets are the best for anonymous and untraceable transactions. In the worse case scenario, these addresses can fund criminal activity, a risk to keep in mind.
- Human-readable addresses (ENS & Domains) — Wallet addresses are long and complex string characters that could be difficult to work with. On some blockchains, such as the Ethereum Name Service (ENS), domains interact with the blockchain through memorable, user-friendly names. They are used to simplify crypto payments and improve UX in Web3 applications. An example is the transfer to username @xxxx in an exchange like Binance.
- Burn Addresses (Dead Wallets) — Blockchain networks may need to burn tokens at some point. Simply put, the portion of assets that goes into a dead wallet moves out of circulation and is lost because there are no private keys for the dead wallet. Burning tokens affect a blockchain network’s economic state by increasing the scarcity of an asset. It also stabilizes a network by reducing overmining and lowering inflation. Some people use these wallets to dispose of stolen funds or hacked funds.
- Layer 2 & Rollup Addresses — Layer 2 solutions allow blockchain networks to increase the speed of their transactions by creating off-chain ledgers. An example is the Hydra protocol on Cardano. Sidechains, too, increase the speed of Cardano by running their blocks parallel to the main chain, offering more specific and independent functionalities. Rollups extended the functionality of side chains. An example is the World Mobile network on Cardano or the Lightning Network for Bitcoin. Wallets on these blockchains can be used to scale networks. More examples include Polygon, Arbitrum, Optimism, and BTC Lightning Network.
Hot vs. Cold Wallets: Key Differences
Let’s reflect on how blockchain technology and cryptocurrencies transform how we perceive, store, and interact with digital assets. There are two ways to store crypto: a hot or cold wallet. Each has its form, benefits, and disadvantages. We’ll look into both.
🔥 Hot Wallets (Online & Connected)
Hot wallets are always connected to the internet. They provide quick and easy accessibility, which makes them suitable for frequent traders. Available as native mobile apps, computer apps, exchange wallets, or accessed through a browser, hot wallets offer convenience, though at the cost of exposure to potential online threats. Examples are MetaMask, Trust Wallet, Phantom, and Binance Wallet. Most of the above-described address types fall into this category.
In their operation model, these wallets store your private keys in your device, linking to a server through the internet. To initiate a transaction, the wallet software uses the keys to sign transactions for you. Signing transactions involves verifying your identity and authorizing funds transfer. These days, hot-wallet applications embed more layers of security through PINs, biometrics, and two-factor authentication in an attempt to reduce exposure to potential online threats.
❄️ Cold Wallets (Offline & Secure)
Developers often follow the best security practices when building online software like wallets, but to error is human. A bug or misconfiguration could grant a malicious user access to your device’s memory, causing you to lose assets. One way to combat this is to use cold wallets. Also known as cold storage or offline wallet, this model remains isolated and disconnected from the internet. These include hardware, paper, and air-gapped wallet variants, but the most common hardware wallets are Ledger, Trezor, and Coldcard.
Similarly, hardware wallets provide advanced features and extensive functionality through a screen to touch or some buttons to press. Paper wallets came first as a list of characters that spell out secret codes but were vulnerable to flood and fire incidents. To achieve more resilience, we shifted to engraving information permanently on metal objects, now called metal wallets. They have become so common that they now store more information than paper ones.
If you want to transact, you start by choosing a hot or cold wallet to which you wish to transfer assets. Next, read the private keys of the metal wallet and key them into the software. Only then will you sign the transaction. This comes with extreme security at the expense of convenience for daily transactions.
The core connection between air-gapped environments for stake pools and cold wallets is that they serve the same purpose: keeping private keys offline. This, in turn, keeps your assets safe from unauthorized access and hacking. The only difference is usage. We use air-gapped environments for stake pool key safety and operations, while cold wallets store individual assets.
Best Security Practices for Wallet Addresses
Generally, the security of crypto wallets begins with application developers. At the development level, some cybersecurity practices include secure key management, robust authentication mechanisms, secure coding practices, network security, secure app deployment, monitoring, incident response, and user education and awareness. If developers uphold their end, what should you do on your end to operate securely?
To ensure the safety of your digital assets, transfer them out of exchanges if you’re not using them at the moment into a self-custody digital pouch. When using accounts offered on exchange services, use strong passwords and change them often — the same applies to private keys. A password generator will be helpful in this case. Keep your private keys safe, and remember that no one should ask you for them, not even customer service representatives.
Achieve more safety by backing up your wallet for retrieval if something happens to your primary device. Because Web3 technology constantly evolves, many hot wallets try to keep up with the best industrial updates. By updating your wallets regularly, you can ensure they have the latest fixes to vulnerabilities from the operating system level to wallet software. Lastly, run security software on your computer to detect malware. Don’t forget to avoid public Wi-Fi when making cryptocurrency transactions.
These days, I do not shy away from opening new wallets. I’m confident that my digital assets are safe because I follow the above practices in my crypto routine. Remember that ” not your keys, not your crypto.” Check out how Midnight is enhancing blockchain data privacy and security on Cardano.
