2. Digital Identity on the Blockchain
Exploring Wallet Options
There are tons of different wallets that exist today with different user interfaces and capabilities. One key factor important to consider when selecting a wallet is which networks you’d like to interact with.
Most wallets support a majority of networks, but some are designed solely for one or two specific ones. Some of the most popular wallets include:
…but there are tons of others that you can use as well. These wallets are generally considered to be the most user friendly wallets in terms of the user experience, and they also support a variety of different blockchain networks. You can also have as many wallets as you’d like; there is no limit to how many you can create. In fact, it’s even considered best practice to have at least two wallets: one would be for interacting with different dApps and conducting transactions, while the other will serve as the main wallet for storing your assets. Having this system in place greatly reduces the threat of you losing your cryptocurrency if a dApp you’ve used gets exploited.
Source: Fortanix
💡 Using multiple wallets for security
As an avid cryptocurrency enthusiast, you interact with a ton of different applications on a regular basis. While most applications are secure and have been through multiple professional audits, you decide to go onto a sketchy dApp that was just created and promises extremely high returns. While this is a clear red flag, unfortunately you don’t realize it and connect your wallet to the application. Once your wallet is connected, you realize the app is a scam but by then it’s too late - the application drained your wallet.
Luckily, you have two separate wallets for this exact reason, and all of your assets are kept in the other wallet. The attacker can’t access your other wallet because you did not use it to connect to their dApp, and all your funds remain secure.
Most crypto native users have multiple wallets for this exact reason, where they have a clean wallet with minimal to no money in it solely for interacting with dApps while keeping all their actual funds in a separate wallet.
The wallet you use to interact with all the dApps is called a hot wallet because it is directly connecting to the Internet and executing transactions, while the wallet for storing funds is called a cold wallet because it is not constantly connected to dApps and only stores assets. Cold wallets are more secure because since they aren’t connecting to the Internet, they can’t be hacked.
For an extra layer of security, you can purchase a hard wallet, or a hardware wallet. These are wallets that utilize a physical device for storage where you can’t access the wallet unless you have the device itself. One popular hard wallet is Ledger where the user would have a Ledger device that acts as the medium for storage, and to access the wallet, they would plug in the device into a computer and enter a passcode.
To further expand on the capabilities of wallets, a new type of wallets are beginning to arise: smart wallets. These smart wallets are actually smart contracts that act as wallets but have the potential to do much more than traditional ones. For example, they can automate transactions, cover network fees to facilitate transactions, and even swap owners. A great example of this is the Safe Wallet which utilizes these features to offer enterprise level wallet solutions.
These smart wallets open up a lot of opportunity for businesses to create built-in wallets into their applications. This can remove the need for their users to maintain self custody, they can cover all transaction fees, and they can assign or reassign different privileges to different wallets.
📋 Practice Question