Web3 Wallets: The Ultimate Guide 2023
Updated: May 18
This is the ultimate guide on what are Web3 Wallets and how they work.
In this article you will learn:
What is a Web3 wallet
What is a Public Key, a Private Key and the Seed Phrase
The difference between Custodial and Non-Custodial wallets
The most popular wallets in 2023
How to choose and secure your Web3 wallet
Table of Content
What is a Web3 wallet?
A Web3 wallet, also known as a crypto wallet, is a device that stores your keys used to access and manage assets in the blockchain, like cryptocurrencies and NFTs.
These wallets serve as a personal gateway to the vast array of decentralized applications (dApps) and smart contracts that comprise the Web3 ecosystem.
How Does a Web3 Wallet Work?
A crypto wallet is composed of three main components:
A Public Key is a cryptographic code that allows users to receive blockchain-based assets. It is public and open to anyone on the blockchain.
While everyone can send assets to the Public Key, the ownership of these assets can be proved only with the paired Private Key.
The Public Key is created from the Private Key through a mathematical algorithm, a similar process is then used to create a Public Address.
A Private Key is usually a long alphanumerical code similar to a password. It is used to access your wallet, prove ownership of assets and authorize new transactions.
In ordinary base-ten notation, a Private Key would be hundreds of digits long and require years to crack it.
The public key is like your email and the private key is like the password, both required to access the account, in this case, the wallet.
The Seed Phrase is a sequence of random words that contains all data needed to access a wallet. It usually comes in a 12 or 24 words format and is generated at the creation of the wallet.
The Bitcoin standard for the Seed Phrase follows the BIP 39 proposal, which gives a list of 2048 words to pull from to create the phrase.
Both the private key and Seed phrase should be kept secret as anyone accessing it can control your digital assets.
Types of Web3 Wallets
We have two main categories of crypto wallets: Custodial and Non-custodial.
There are also Smart Contract based wallets, MPC and Multi-signature wallets.
A custodial wallet is a type of cryptocurrency wallet where the private keys to the wallet are held and managed by a third-party service, such as a cryptocurrency exchange or a dedicated wallet service.
It contrasts with non-custodial wallets, where the user has exclusive control over their private keys and hence their funds.
In a custodial wallet setup, the service provider is responsible for the stored cryptocurrencies' security. This includes protection against hacks, loss, and theft. These providers typically have robust security measures, including two-factor authentication, encryption, cold storage, and sometimes insurance against losses.
The Decentralized maximalists usually avoid Custodial wallets, following the mantra “Not your keys, not your coins”.
Custodial wallets can be more user-friendly, especially for newcomers to the cryptocurrency space, as they handle the technical aspects of managing private keys. In addition, many custodial services offer additional features such as buying, selling, or trading cryptocurrencies directly within the wallet and interest-bearing accounts.
However, the primary downside of custodial wallets is that they don't align with the decentralization ethos of cryptocurrencies. Since the third-party service controls your private keys, they ultimately control your funds. It means that if the service is compromised, goes bankrupt, decides to freeze your account or acts malicious, you risk losing access to your funds.
The latest FTX collapse is a clear example of what can happen to a centralized entity.
A non-custodial wallet is a cryptocurrency wallet where the user has complete control over their private keys and, therefore, their funds. In contrast to custodial wallets, where a third-party service holds and manages the keys, non-custodial wallets allow users to manage their cryptocurrencies directly.
In a non-custodial wallet setup, only the user can access their private keys. This level of control means that no third party can freeze, lose, or otherwise mishandle the user's funds. It aligns with the decentralization ethos of cryptocurrencies, where individuals are their banks.
However, this also means that the responsibility for security lies entirely with the user. If a user loses their private keys or seed phrase, they lose access to their funds with no way to recover them. Similarly, if a malicious actor gains access to the user's keys or seed, they can steal the funds.
Non-custodial wallets can come in two forms:
Hot wallets: including software wallets that are installed on a computer or mobile device;
Cold Wallets: hardware wallets that store keys offline on a physical device, and paper wallets where keys are written down and stored physically.
Dive deeper into the difference between Hot wallets and Cold wallets.
Popular Web3 Wallet in 2023
Here are some of the most popular Web3 wallet examples in 2023.
MetaMask is a Web3 wallet and gateway to blockchain apps. Available as a browser extension and a mobile app, MetaMask allows users to manage, transfer, and receive Ether and ERC-20 tokens. Its user-friendly interface and secure design make it a popular choice among beginners and seasoned crypto enthusiasts alike.
Trust Wallet is a secure and intuitive mobile wallet that supports a wide range of cryptocurrencies, including tokens from the Ethereum, Binance, and Tron networks. It also includes a Web3 browser, allowing users to interact with dApps directly from their mobile device.
Ledger wallets refer to a type of hardware wallet created by the company Ledger..
Ledger offers two main hardware wallet models: the Ledger Nano S and the Ledger Nano X. Both models securely isolate your private keys within a certified secure chip on the device, ensuring that your private keys never leave the device and cannot be exposed to potential online threats.
Coinbase Wallet, separate from the Coinbase exchange, is a standalone wallet designed for managing a wide range of cryptocurrencies and interacting with dApps. It boasts a user-friendly design and a high-security standard.
Argent is a smart contract-based wallet with a focus on DeFi. It offers features like daily transfer limits, wallet locking, and the ability to recover access without a seed phrase, making it popular for those seeking additional security features.
Choosing the Right Web3 Wallet
Choosing the right Web3 wallet depends on your specific needs and risk tolerance.
If you prioritize security and don't mind a less convenient setup, a hardware wallet like Ledger or Trezor is a great option.
For everyday use, Metamask or Trust Wallet offer ease of use and integration with many decentralized applications.
For large, institutional amounts, a custodial wallet could be appropriate.
Always consider the wallet's security features, ease of use, compatibility with your preferred cryptocurrencies, and reputation in the community. Remember, the ultimate responsibility for securing your digital assets lies with you.
Securing Your Web3 Wallet
Securing your Web3 wallet is critical to protect your digital assets. Start by using a hardware wallet for storing large amounts of cryptocurrencies, as these are immune to most online threats.
For software wallets, use a secure computer free from malware. Always enable two-factor authentication and never share your private keys or seed phrases. Regularly update your wallet software to get the latest security patches.
Be cautious of phishing attacks trying to trick you into revealing your credentials. Lastly, consider using a separate, dedicated device for cryptocurrency transactions if you hold a significant amount. Always remember, your wallet's security is in your hands.
As we forge ahead into the era of Web3, the importance of Web3 wallets cannot be overstated. They are the bridge connecting us to the decentralized web, enabling us to manage our digital assets and interact with dApps.
As the technology matures, we can expect to see even more functionality and usability from our Web3 wallets, creating a more inclusive and empowering internet experience for everyone.