In its simplest form, a cryptocurrency wallet is just something that stores a private key that controls a blockchain/DLT account that holds tokens and uses that key to “sign” transactions for that account.
A software wallet is a piece of software that performs this function – and typically includes more functionality and a nice user interface to make interacting with a blockchain and accounts there more convenient. For example, they usually read the blockchain to show you things related to your accounts, such as current token balances and recent or pending transactions. They might also make it easier to do specific things like stake tokens or interact with DeFi smart contracts.
An example of a popular software wallet is Metamask, which holds a private key (using a seed phrase), shows token balances and transactions, and can easily connect to DeFi applications using web3 technology.
While convenient, a security weakness of software wallets is that they live on your computer or phone. They are thus usually exposed to the internet. Therefore, you must take great care to protect a software wallet and the private key that it contains.
Another approach is a hardware wallet; this is a physical device that typically is focused just on securely storing a private key and signing transactions using it. Hardware wallets must connect to a piece of software to give the user an interface to see token balances or create transactions. But the hardware wallet is responsible for signing the transactions (typically requiring a PIN) so that the private key is never stored on a computer connected to the internet. Just as with a software wallet, you must carefully back up your private key (or seed phrase) in case the hardware wallet is lost or damaged, but using a hardware wallet makes it much easier to protect your private key and transactions.
Radix has a mobile software wallet called the Radix Wallet that supports a hardware wallet, the Ledger Nano S/S+ and Ledger Nano X. The Radix Wallet is a total game-changer for wallet security because it can support (not at Babylon mainnet launch) multifactor signing, multifactor recovery, and social recovery offered by Radix’s Smart Accounts. This means that a Smart Account is not at the mercy of a single all-or-nothing seed phrase, but can be configured to require multiple factors such as phones, Yubikeys, software or hardware wallets. This is far more secure because if one of these factors is compromised or lost, the other factors would still be secure and available.
- Start Here! Radix Wallet User Guide
- Using Ledger Nano S or X with the Radix Desktop Wallet
- What Is Bitcoin?
- What is a token?
- Smart Accounts and the End of Mandatory Seed Phrases