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An Explanation of How Wallets Work

Author: J P Moneybags

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I swear... I wish that someone had explained all of this to me last year, when I was just starting out and had no idea what I was doing. It would have saved me a lot of confusion and a couple of stupid mistakes. So I hope that you are reading this now in hopes of avoiding those same issues. And that is what my hope is for this blog entry.

What is a wallet?
It is exactly what it sounds like. It's is a container used to hold money. In this case, the money is virtual currency. The container itself requires a little bit more of an explanation, because wallets come in a few different varieties. The manner in which they vary is dependent on how the wallet is created, what it holds, where it is held, and most importantly - how secure is it?

Let's start off with the basics... How does a wallet work?
A cryptocurrency wallet is a software program that stores private and public keys and interacts with various blockchain to enable users to send and receive digital currency and monitor their balance.
Each wallet has an address in the blockchain. All it really looks like to the normal human is a string of apparently random characters. Which makes sense, because when the wallet is created, that is precisely how it is done. Except that the characters are not as random as all that. It's an encrypted string containing information like what kind of coin it holds, and its address on the blockchain. No matter how else you choose to view or use your wallet, that string is the unique identifier for it. There is also a secondary string that goes along with it that is the "Private key". Without that private key, you cannot access the wallet to make use of anything in it.

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The picture here is one of my DOGE wallets. I have no fear of showing it because that is the public address for the wallet. It can only be used for 2 things; seeing what is in it, and sending deposits to it. Feel free to send a deposit to it. I have no problem with that.
Anyway... This is a great example of what they call a "paper wallet". It is like any other wallet. Except that it is not controlled by anyone other than myself. Even the site used to generate the key on the blockchain doesn't know anything about it, and cannot access it. The only way it could be stolen is if someone got their hands on the private key. This is why it is so important that you keep the private key private.

There are a number of different software programs for your laptop, or apps for your phone, or online wallets. All of these work essentially the same way in that, they are not an exchange or anything. They are just a place to keep your stuff. Those are not the wallets I wish to speak about in this article, as you will see. I am intending to concentrate on truly offline wallet solutions. But before I can get much further with that... Some more words on various wallets.

Where do these wallets come from?
Any exchange, miner, or faucet site on which you create an account will give you the ability to create a wallet to hold on to whatever it is you plan to gather while there. In many cases, this wallet is entirely local and not really on the blockchain. Or at the very least, the wallet's private key is controlled by the site. So you can only gain access to the funds within from that site. To make matters worse, almost every one of these sorts of sites will have a minimum that you must meet before you can offload anything at all. So be careful where you invest your coins. Because you might get stuck holding them in someplace that you cannot get them out.

This is a good spot to point out a major problem with security for these sorts of things. Since you have no control over the actual wallet, specifically the security of that wallet, it is in constant danger of being hacked. When that happens. You may lose whatever it contains. This is where the old adage, "don't keep all your eggs in one basket" comes into play.

That's frightening!
Well, yes. It is... It is an inherent danger with this stuff. But the good news is there are ways to secure your coins in wallets that you actually DO control. And there are ways to absolutely keep your funds safe from hackers.

This is precisely what brings me to write this article. It's a good idea for you to keep at least a portion of your proceeds in some sort of so called "cold storage". That is, off the exchange. Off the mining site. Off the faucet site. This is where the paper wallet I showed above comes in to play. For my part, once I gather a reasonable amount of stuff on my favorite exchange, I convert it to DOGE and withdrawal to my local wallet. There my money is locked down and secure. It is reasonably safe. Certainly from anyone hacking it. But even this method is not the most secure method there is.

So what is the most secure method there is?
By all accounts, that appears to be the hardware wallet. Usually these things come in the form of a USB device like this thing.

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That is a USB device that contains all the encrypted information, including the private keys. Usually those keys are kept in protected memory on the device. These things run entirely self-contained. They cannot be broken. They are immune to viruses or other software issues. You can deposit and withdraw from the devices, in many cases without even plugging it in. There are a bunch of these things available nowadays. If you are really serious about security, and you can afford the initial expense, this is the way to go.

About the only downside is that those things are usually pretty specific to Bitcoin. And they are really marketing to people that are holding many $1000s... These are not devices for the little people like me. As far as I know they do not make those sorts of things to hold all the 100s of low value coins. That's what paper wallets are for.

How do you get one of those fancy paper wallets?
I'm sure there are hundreds of ways to do this. After doing a little research, I found one that is not only reliable and secure, but the site is not loaded with bullshit or ads. They respectfully request donations, and that's about it. You can create a wide variety of different wallets for different coins. I have created ones for DOGE, XMG, and LTC; all of which worked just fine. I made a simple deposit in each to test... They work great. Now I have some cold storage.

The site is WalletGenerator.net. You really don't need to go to the site more than once. You go there and download the entire open-source project, and run it from your local machine. Why do you do this? Because you do not want to be connected to the internet when you run it. You download the site, unzip it into an empty folder, and run the index.html file in your favorite browser. Turn off your wifi first so you are offline.

The reason for this is simple. No matter how secure your network is, you don't want to take the chance on someone intercepting the keys that are created. Once you create your new keys, you print them or save them to a USB drive, or something. Keep them safe. And you can use the public keys to send money to them from anywhere. Full instructions are on the page.

In order to check on the funds and activity on your wallet, once you have something deposited in it... You just need to check the blockchain. Just do a Google search for any of the gazillion sites that will check the blockchain for any coin. I would love to make this easy by providing a list of these sites, but really, a Google search will give you all you need.


#bitcoin #cryptocurrency #wallet #cryptowallet

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