What Are Decentralized Wallets

2022-09-05 15:36:59

Crypto wallets are one of the most vital infrastructures in the blockchain space. They are used to store private keys. Crypto assets such as BTC and ETH are stored on the blockchain, and private keys are closely related to cryptos. In a way, private keys equal assets, and whoever owns the private key of a wallet controls that wallet. In other words, having access to the private key allows one to transfer cryptos from the wallet at any moment.

 

What kinds of crypto wallets are there? What are the merits of decentralized wallets? Let’s dive into these questions one by one.

 

I. What are decentralized wallets?

Decentralized wallets allow users to keep the private key by themselves, while centralized wallets do not. As their name implies, centralized wallets ask a centralized third party to keep users’ private keys. In the crypto space, exchanges are the most frequently used centralized wallets.

 

Suppose we have registered an account on a centralized exchange and deposited cryptos into the account. Although we own the account number and password, the private key of the wallets that actually store our cryptos is kept by the exchange, not us. That is to say, our cryptos are hosted on the exchange. As such, our exchange account is, in fact, a centralized wallet.

 

Compared to centralized wallets (e.g. centralized exchanges) that ask third-party service providers to store our private keys, decentralized wallets allow users to keep their keys by themselves. When using decentralized wallets, users are the real owners of their cryptos, which are stored on blockchains, and wallets are just a tool that helps users manage their on-chain assets and read the on-chain data. As a result, decentralized wallets cannot control, steal, or transfer your cryptos.

 

Therefore, compared to their centralized peers, decentralized wallets are less likely to be hacked, and users of decentralized wallets do not have to worry about the misappropriation of funds by the service provider because the private key is controlled by themselves, rather than the wallet. With decentralized wallets, our cryptos would be safe and secure as long as we properly keep the private key when creating a wallet. This is the case because our cryptos are always stored on blockchains, and we will be able to see our assets in a different crypto wallet.

 

II. Pros and cons of decentralized wallets and centralized wallets

1. Asset control

First of all, the greatest advantage of decentralized wallets over centralized wallets is that they allow users to keep their private keys by themselves. In other words, users of a decentralized wallet exercise full control over their cryptos, which will remain safe as long as the private key is not disclosed. Using a decentralized wallet, you will not be robbed of cyptos by any individual or organization, which is consistent with the blockchain spirit of decentralization. Moreover, users of a decentralized wallet may check all transaction records such as transfers on the blockchain.

 

When we use a centralized wallet, our private keys are kept by the wallet provider. In the blockchain world, the private key equals unhindered access to assets, so using a centralized wallet could expose your cryptos to huge security risks. For instance, if a centralized wallet decides to exit or if the project fails, the team could always drain your wallet and disappear in no time.

 

Centralized wallets are like banks. A user deposits their money into a bank, and the bank provides him with an account to record his funds. Meanwhile, the bank has full control over the funds and could, in theory, freeze or transfer the user’s money whenever it sees fit.

 

Decentralized wallets keep crypto assets safe on the level of the underlying mechanisms, but centralized wallets lack such strong mechanisms to ensure security, which means that the platform could do whatever it wants with your assets or even transfer your assets without approval.

 

2. Asset risks

The two kinds of crypto wallets face different risks. Since centralized wallets do not depend on blockchain networks, they acquire data from their centralized servers, which is vulnerable to attacks. Threatened by serious security risks, centralized wallets are frequently hacked.

 

The risks of using decentralized wallets, on the other hand, mainly arise from the improper management of private keys, such as the leak or hacking of private keys. When users lose their private keys, they lose their cryptos as well.

 

3.Ease of use

In comparison, centralized wallets are easier to use. To get started with a centralized wallet, as is the case with any other application on the Internet, we only have to register an account. Plus, if you forget your password, you can always get it back as the data is stored in the wallet’s central server, and centralized wallets face great security risks precisely because they store user information on such servers.

 

Decentralized wallets involve more complex operations and are harder to use as they differ from the regular application. When it comes to decentralized wallets, the most vital information that users must keep is the private key and mnemonics, which are meaningless characters that are randomly generated. That makes decentralized wallets less convenient for users.

 

III. Tips for using decentralized wallets

First of all, when installing a decentralized wallet on your phone, be sure to look for the official website (for example, you should download CoinEx Wallet at https://wallet.coinex.com/), and do not download a wallet app on other non-official websites.

 

Secondly, in the blockchain world, losing the private key means losing cryptos. Therefore, we must back up our private keys. For instance, you can make multiple written copies of your private key and keep them in different places in case you lose one of the copies. Do not disclose your private key or mnemonics to others, and try to keep them offline.

 

Moreover, to diversify the risks, you may also store your cryptos in multiple decentralized wallets. It is also important to back up your wallets and check your assets on a regular basis, which allows you to identify and solve problems as soon as possible.

 

In a nutshell, compared to centralized wallets, decentralized wallets allow users to keep private keys by themselves and fully control their cryptos. Moreover, decentralized wallets are resistant to censorship, and no individual or organization may confiscate or seize assets stored in a decentralized wallet, which also helps to make cryptos valuable.

 

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