What is a Web3 wallet? How do custodial vs non-custodial wallets work?

As the world of cryptocurrencies continues to evolve, understanding the different types of wallets available is crucial for secure and convenient management of digital assets.

TL;DR

• Explore the concept of Web3 wallets

• Delve into the differences between custodial and non-custodial wallets

• Discuss the advantages of hot and cold wallets

• Examine the concept of multisig wallets

What is a crypto wallet?

In the era of Web3 and decentralized applications (DApps), a Web3 wallet plays a vital role in interacting with the blockchain network. It serves as a secure repository for generating and storing keys necessary for conducting transactions and managing digital assets.

• Helps users to control private encryption to access and enable transactions (sending and receiving)

• Enables connection and interaction with DApps

• Able to store multiple addresses

Understanding custodial and non-custodial wallets

Custodial wallets and non-custodial wallets represent two distinct approaches to wallet management:

Custodial wallets: convenience at the cost of control

Custodial wallets involve a third party controlling the private keys for the users. These wallets are often provided by centralized exchanges, offering users a convenient and user-friendly experience. While custodial wallets simplify the management and trading of cryptocurrencies through password-based access, users must trust the custodian with the security and integrity of their assets.

Non-custodial wallets: taking control of your digital assets

Non-custodial wallets, on the other hand, grant users complete control over their private keys. Private key signing is performed offline within hardware wallets, providing enhanced security. Non-custodial wallets are governed by smart contracts and enable individuals to maintain full ownership and sovereignty over their digital assets.

Exploring hot and cold wallets: balancing convenience and security

Hot wallets and cold wallets represent different approaches to storing private keys:

Hot wallets: convenient, less secure

Hot wallets store private keys in an online environment, making them easily accessible through software applications such as web wallets (e.g., Metamask), mobile wallets (e.g., Binance Web3 Wallet), and desktop wallets (e.g. Exodus). Although hot wallets provide convenience and accessibility, they are considered less secure due to their connection to the internet.

Cold wallets: maximizing security at the expense of convenience

Cold wallets, in contrast, store private keys offline, away from internet connectivity. Examples of cold wallets include hardware devices like Ledger and Trezor, as well as paper wallets. By keeping private keys offline, cold wallets provide enhanced security but may sacrifice some convenience in the process.

What are multi-signature wallets and social recovery wallets?

Multisig wallets and social recovery wallets offer additional layers of security and recovery options:

Multisig wallets: strengthening security with multiple signatures

Multisig wallets require multiple private keys to sign a transaction, providing an extra layer of security. Initially associated with the Bitcoin network, multisig wallets serve as a form of two-factor authentication. They require more than one private key to authorize outgoing transactions, reducing the risk of unauthorized access and potential theft.

Social recovery wallets: regaining access to lost keys

Social recovery wallets use smart contracts to allow users to regain access to their assets even if they lose their private keys. These wallets incorporate a 'guardian' system, where trusted parties, such as friends, family, or institutions, can sign transactions on behalf of the wallet owner.

Ideally, a social recovery wallet has multiple guardians, typically around seven. These guardians can collectively help recover a lost key and verify the owner's identity. The guardians do not need to know each other's identities to ensure anonymity and prevent collusion. Social recovery wallets provide an additional layer of security and peace of mind for users who may be concerned about the risk of losing access to their funds.

What is a keyless wallet: using multi-party computation technology

Most wallets rely on numerous private keys and mnemonic phrases to protect our funds, but once we lose our keys, we lose access to our digital assets. This has prevented the full-scale adoption of Web3.

A keyless wallet uses multi-party computation (MPC) technology to enable multiple parties to collaborate on signing a transaction while keeping all private data confidential. By employing distributed key generation, the individual private keys are divided into several parts and stored separately by the parties involved. When creating a signature, the different parties must come together to generate a complete signature.

What are the components of a wallet?

Understanding the relationship and functionality of seed phrases, private keys, and public keys is essential for effectively managing and securing cryptocurrency assets within a wallet.

Seed phrase

The seed phrase, also known as a mnemonic, recovery phrase, or backup phrase, serves as a master key to the wallet's private keys. Typically consisting of 12-24 words, the seed phrase enables the recovery of a cryptocurrency wallet's private keys. This recovery is possible if the initial generation of private keys was done using the same seed phrase. The seed phrase allows for the generation of an unlimited number of crypto accounts with the same set of seed words.

Private keys

Private keys serve as secret keys, resembling passwords, that are linked to individual addresses (accounts) within the blockchain network. These keys act as variables within algorithms, enabling the encryption and decryption of data. Typically, private keys are represented as strings of alphanumeric characters. By successfully signing a specific message with the private key, individuals can demonstrate their ownership of a particular blockchain address, verifying their control over the associated account.

Public key

The public key plays a crucial role, functioning as an address where anyone can send cryptocurrency transactions, much like a bank account number used for routing deposits. Public keys are derived from private keys through asymmetric algorithms, which create a matching pair of keys.

The public key is employed for the encryption of messages, while the private key is used for its decryption. This makes sure that only the intended recipient, holding the corresponding private key, can decipher and access the contents of the message. This maintains secure communication within the cryptocurrency ecosystem.

Connection between seed phrase, private key, and public key

• Private keys, similar to passwords or access keys, provide access to specific public keys, much like email addresses associated with different accounts.

• The seed phrase acts as a means of retrieving multiple private keys/passwords, akin to secret questions/answers used to recover access to a wallet.

Why OKX Wallet?

Among the various wallet options available, OKX Wallet stands out as a notable example. OKX Wallet is a non-custodial, multichain digital asset storage and management tool. It can be accessed as a browser extension or through mobile and web applications.

Features of OKX Wallet

• Hot wallet: OKX Wallet is primarily used as a hot wallet, offering users convenient access to their digital assets.

• Multiple network support: OKX Wallet supports a wide range of networks, allowing users to manage various cryptocurrencies using a single wallet address.

• Lower fees: Compared to other wallets, OKX Wallet offers lower transaction fees, making it an attractive option for cost-conscious users.

• Keyless wallet function: OKX's keyless wallet is built on MPC technology. It divides a single private key into three distinct parts. These components are generated separately and stored in various places. Having the entire private key to authorize a transaction is no longer necessary since only two components are needed.

• Swap functionality: OKX Wallet enables automatic swapping of non-underlying tokens with underlying tokens. It provides a clear trading path and offers yield products for users to explore different opportunities.

• Account abstraction smart account: Account abstraction (AA) smart account enhances security with multi-factor authentication and easy account recovery. It simplifies complex actions such as token swapping on a DEX, allowing tasks to be completed in one step for greater convenience. It's also user-friendly, removing the need to use the main chain coin for gas. This enables gas payments to be made with any token, including stablecoins, while also allowing third-party gas payments.

• Convenience: You can even access other products, like OKX DeFi, an all-in-one platform to help you make the most of decentralized finance. Use this one-stop hub to manage activities across different DeFi protocols.

Block confirmations in OKX Wallet

Block confirmations play a crucial role in validating transactions within the OKX Wallet. When a transaction's trading data is added to a block for the first time, it receives zero confirmations. With each additional block, the number of confirmations increases. Miners add trading data to blocks on the blockchain, protecting the integrity and immutability of transaction records.

The number of block confirmations required for both deposit and withdrawal transactions is communicated to users. Delays in crypto transactions can happen based on the time it takes to achieve sufficient block confirmations, particularly for larger transactions.

The final word

In the rapidly evolving landscape of cryptocurrencies, choosing the right wallet is essential for the secure management of digital assets. Understanding the distinctions between custodial and non-custodial wallets, hot and cold wallets, multisig wallets, and social recovery wallets empowers users to make informed decisions based on their specific needs and preferences.

OKX Wallet serves as an example of a non-custodial wallet solution with its unique features and benefits, catering to the diverse requirements of cryptocurrency enthusiasts.

By applying the capabilities of Web3 wallets and adopting secure wallet practices, users can navigate the crypto ecosystem with confidence, protecting the safety and accessibility of their digital assets.