To own crypto-currencies, interact with decentralized ledgers or trade bitcoin, you need a wallet. Wallets have a variety of offerings that are categorized based on how the wallet is accessed. The level of security offered by a bitcoin wallet service are different than traditional payment services. However, surveys show consumers feel bitcoin wallets are more secure than mobile payment services like ApplePay. Bitcoin wallet risks are managed based on the level of comfort the user feels towards interacting with blockchain transactions. New users will gravitate towards wallets that are more transparent about how their funds are managed. Read more below to learn about various wallet offerings, and what to research when choosing your next wallet service.
Wallet Security Features and Services
Private Key storage is an important factor when choosing a wallet service to interact with a blockchain. Transactions on a blockchain are authorized when two users share their public key and then verify the transaction with the signature of their private key. Private key storage is offered in digital and physical forms. Wallet services, like Coinbase, interact with your currency like a traditional banking company. Coincase holds your funds, but is susceptible to single access failure, and no transparency of actual ownership of Bitcoin. Other wallet services offer complete control of all your funds, but leaves the risks of handling funds on the owner.
How Bitcoin is moved in a blockchain transaction
How change is handled in blockchain transactions is a unique feature interacting with blockchain technology. When two users exchange funds in a transaction, the 'change' leftover is sent to a newly generated bitcoin address which does not link back to the originating wallet. This was problematic, as the amount of addresses were limited in early bitcoin clients. After a predetermined limit, transactions could be linked to individual wallets. Deterministic wallets are designed to generate an unlimited amount of addresses that can be stored in a variety of ways.
There are two main types of deterministic wallets:
Type 1 Deterministic Wallet: Generates a single private key from an originating address but does not offer a Master Public Key.
Type 2 Hierarchical Deterministic Wallet: A Master key generates a child key that features a 128 bit value that is presented to the user as a 12 word mnemonic. This mnemonic is created after 100,000 rounds through the SHA256 cryptographic hash function.
Ease-of-Use is an important quality of wallet service and is increased as the amount of steps required to complete a transaction decreases. Some wallets require additional devices to be able to interact with their products, and other wallets only require a single device. Many companies are attempting to decrease the level of complexity when completing transactions and may also increase security risks. Middle man attacks are still prevalent when interacting with devices that can connect to an outside network, but your funds are less likely to be stolen if the private key is stored correctly.