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PATHWAY G) Wallet Knowledge (Leveling Up)

chapter 1/4

What Is a Software Wallet?

Beginner
Grey closed belt on a purple background.
KEY TAKEAWAYS:
— A crypto wallet stores the private and public keys that give you access to your cryptocurrencies and allows you to send, receive and manage your crypto

— A software wallet, also known as a hot wallet, is an application that exists on a connected device such as a phone or computer. It is always connected to the internet.

— Software wallets make it convenient to access dApps but are susceptible to online attacks. They should always be paired with a hardware device for security.

Crypto users can store their digital assets at a unique blockchain address, and retain absolute control over it via the corresponding cryptographic private key. This private key is secured by something known as a crypto wallet.

If we’ve lost you already, make sure you read the full article on what a crypto wallet is. But essentially, a crypto wallet stores the public and private keys for your blockchain addresses, allowing you to access crypto, monitor your balance and transact on the blockchain. These crypto wallets can also store the private keys for a near infinite number of accounts. And, they’re all protected by a single recovery phrase—a sort of master key for all of your private keys. 

Exactly how that crypto wallet stores your private keys, and your secret recovery phrase, very much impacts the security of your wallet. And as a result, there are multiple types of crypto wallets, including custodial wallets, multisig wallets and even hardware wallets. But one of the most popular types of wallets, and the subject of this article, is the software wallet. Usually, these are often crypto user’s first type of wallet. But they’re not just for beginners, so what are they exactly?

What Is a Software Wallet?

In a very simple sense, a software wallet is an application that you install on your computer or mobile phone that interacts with the blockchain; allowing you to send, receive, and manage your crypto assets. But of course, there’s a bit more to it than that.

Firstly, it’s important to note that crypto wallets—software wallets included—do not actually store crypto at all. Crypto is stored on the blockchain, and your crypto wallet merely stores the keys that grant you access to manage it, if your wallet is non-custodial that is. And in fact. That’s one of the most important aspects of a software wallet.

Software Wallets are Non-Custodial

To explain, software wallets put you in direct possession of your private keys. This ensures you can still access your assets on the blockchain directly, even if the wallet interface itself ceases to exist.

This contrasts with custodial crypto wallets, such as those used on centralized crypto exchanges. To explain, a custodial wallet also uses software to operate but it doesn’t leave you in possession of the private key for that account. Instead, the central entity issuing the wallet (generally an exchange) retains that account’s private key for itself. You gain access by entering a username and password into the centralized entity’s interface.

Software Wallets Are Simply Software

Then, like the name suggests, software wallets are simply software that is installed and managed via a host device, such as a smartphone or laptop. To initiate and confirm transactions, it uses your host device’s screen to present you with an interface. Plus it keeps  your private key in an encrypted state within your browser’s data store. This is called “hot storage” and it essentially means your private keys are easy to access, great for user experience, not so great for security. But before we get there, let’s dive into how software wallets work exactly.

How Does a Software Wallet Work?

Like most crypto wallets, software wallets generate  public and private key pairs. For all crypto wallets, a public key is viewable by others and can be shared with the sender/recipient. A private key, on the other hand, should never be shared with anyone, as it is what allows one to access the funds. Rather than storing your crypto, your crypto wallet stores these private keys.

Software wallets store both public and private keys within its interface on your internet-connected device, like a laptop or smartphone. Once you install the wallet’s interface on your computer or mobile phone, you can manage your assets from there. The application is normally protected by a password, so that only you can access the wallet, create accounts and transact with the private keys it stores.

When you go to sign a transaction, it’s this piece of software on your device that presents you with the intent and prompts you to sign. In short, the intent is like an electronic proposal. When you read the transaction and decide to click confirm, the software wallet uses your private key to sign the transaction, then sends that signed transaction to the rest of the network using your internet-connected device. It’s literally that simple. 

So, now you know how they work, you might want to know the pros and cons of using a software (hot) wallet in the first place.

Benefits of Software Wallets

Software wallets are a popular choice for crypto users for a number of reasons:

Minimal Barriers to Entry 

Firstly, anyone can download a software wallet and install it on their device. Plus, they are usually free to download, install and use. 

Web3 Compatible 

Lots of blockchain apps will support a select few crypto wallets. The most popular software wallets tend to have the biggest range of blockchain apps, services and platforms to choose from. They are also very versatile, with many also offering bridge or swap services between multiple chains.    

Ease of use 

These wallets have a simple interface for beginners, making them popular if you’re just getting started with crypto. They are also very quick to set up. Since the app resides on your connected device, they are also easy to use on a daily basis. Once you open the wallet app, you’re already connected to the internet and ready to start interacting with dApps and DeFi. This can be both an advantage and a risk.

Risks of Using a Software Wallet

Despite the many benefits of software or hot wallets, they also have some significant drawbacks.

Online Keys Are Not Secure

The most significant risk of using a software wallet is that it typically stores your private key in your browser’s data store, albeit in an encrypted state. However, this means your private keys are susceptible to online threats since your browser is always connected to the internet. Unfortunately, clever hackers can use the connection to deploy spyware to your device and gain critical information such as your login details or extract your private key directly.

The TrustWallet hack is a good example of this type of attack in action. In this case, hackers spotted a vulnerability in the wallet software and used it to gain access to users’ private keys remotely. 

In short, not isolating your private keys from your internet connection leaves you vulnerable to any bad actor looking to target your device remotely. The worst bit is: You’ll have no idea until it’s too late.

On-Screen Transactions Are Not Tamper Proof

Transacting with any wallet also poses another potential attack vector: The screen it uses. Software wallets present transaction details on the screen of your device, enabling you to cryptographically sign to confirm. However, devices such as smartphones and laptops are vulnerable to hacking. Once you have some malware on your device a hacker can interfere with the display of your phone or computer. 

That means any device that could contain malware can not be fully trusted. Any time you trust the screen of your laptop or smartphone, you could be signing a malicious transaction. But there is no alternative for software wallet users. Your only choice is to trust the screen, without first verifying what you’re signing. At that point, it’s too late.

Software Vs Hardware Wallets: What’s the difference?

Well firstly, a hardware wallet is a physical device and physical devices require physical components—not to mention a team of experts to design, produce and distribute them. This means that hardware wallets are not free. 

Software wallets, on the other hand, are pieces of software that operate via a host device, such as your laptop or smartphone. As such, they tend to be free of charge.       

Next, the biggest difference is in where they store private keys. Both hardware and software wallets are non-custodial–meaning they allow you to control your own private keys–however that’s largely where their similarities end. 

To illustrate, a hardware wallet secures your private keys on a computer chip within a specific physical device, rather than simply on your internet connected device. That means the chip, and therefore your private key, stays isolated from your connection and the risks associated with it. Even if a hacker tries to exploit your internet connected hardware, they will never be able to extract your private keys. They are simply out of reach. Ledger hardware wallets even go a step further in keeping you secure using a Secure Element chip—the same chip you might find in your passport or bank card. This tamper-proof chip guarantees that your keys stay just as private as you hoped.

Finally, while software wallets show you what you’re signing for on a computer screen that can be tampered with, a hardware wallet displays transaction details on the hardware device itself. Since Ledger hardware wallets use the secure element they are impermeable to hacks, plus, with the Trusted Display you can be absolutely sure of what you’re signing before you confirm.

How To Use a Software Wallet Correctly

Crypto wallets are key to accessing the cryptocurrency space; but not every platform accepts every wallet. While it would be most secure to use a hardware wallet for all platforms, that’s not always an option.

Luckily, even when you must use a software wallet, you can combine it with a hardware wallet to experience the best of both worlds. While the software wallet provides you access to the platform you want, your hardware wallet can protect your private keys and sign transactions offline. This way, you can easily access apps and services with the confidence your private keys are secure. 

Connecting these two wallet types is simple, but the process varies slightly from wallet to wallet. So, before you start connecting your wallets, let’s explore some of the most popular software wallets today and how you can connect your Ledger to enhance the security of each of them.

Most Popular Software Wallets in 2023

There are a variety of software wallets available in the market; perhaps too many to choose from! However, let’s take a look at some of the most popular software, or “hot” wallets on the market today.

Metamask

MetaMask is a leading self-custodial software wallet that enables you to manage your crypto assets and NFTs with ease. Plus, it supports multiple blockchains—including Ethereum, BSC, Avalanche, and layer 2 networks such as Optimism, Arbitrum, and Polygon. Not only that, MetaMask also allows you to send and receive ETH-based tokens too, broadcast transactions, and interact seamlessly with dApps. 

You can either use its browser extension, available in Chrome, Firefox, and Brave, or its mobile app, which is available on both iOS and Android devices. And to maximize its security, you can use MetaMask with a Ledger hardware wallet. This is an incredibly seamless, and secure experience. Even MetaMask itself suggests you use a hardware wallet in conjunction with their own wallets.

Phantom

This non-custodial wallet is tailored for the Solana blockchain. With Phantom, users can trade, receive, send, store, and manage assets conveniently. The wallet lets you swap tokens, display NFTs and even stake SOL. Plus, of course, you can also use it to access countless dApps on Solana, Polygon, and Ethereum. 

Phantom is also available on mobile phones as a Chrome, Brave, Firefox, and Edge browser extension. To protect your new Solana hot wallet, make sure you connect your Phantom wallet with Ledger. Using these tools together, you can access countless blockchain apps while keeping your keys offline and under your control.

Keplr

Keplr is the non-custodial software wallet which allows seamless interchain functionality within the Cosmos ecosystem. In fact, it’s often called the first ever IBC-enabled wallet for the cosmos ecosystem. That means you can easily access countless dapps in the IBC ecosystem, such as decentralized exchanges (DEXs), DeFi lending and borrowing platforms and much much more. Keplr operates as both a mobile app, available on Anroid and iOS, and a browser extension, available on Chrome, Firefox and Edge. And with over 900,000 users, it’s still the most popular wallet for exploring the Cosmos ecosystem. Luckily, you can also protect your Keplr wallet using a Ledger hardware wallet. Connect your Keplr wallet to Ledger and benefit from the best of both worlds: A whole ecosystem at your disposal without compromising on security.

Temple

Temple Wallet serves as both a dedicated mobile app and a browser extension designed for interacting with the Tezos blockchain. With this wallet, you can securely hold, stake, and swap Tezos-based tokens and collectibles. It simplifies account importing from other Tezos wallets and supports simple private keys, mnemonics, and fundraiser account imports.

You can create, import, and manage multiple accounts through a single interface using Temple Wallet. Plus it also supports many tezos dApps. Not only that, you can also connect Temple to Ledger to benefit from the security of the Ledger ecosystem while exploring web3.

Talisman

Talisman was initially a Polkadot and Kusama wallet but has recently announced full support of Ethereum, and EVM Layer 2 blockchains like Base, Optimism, and Aribtrum.

Talisman Polkadot and Ethereum wallet simplifies Web3 for beginners and unleashes advanced capabilities for experts. Designed to be multi-chain, it allows seamless interaction with various blockchains while ensuring the security of your assets. Create and manage the keys for your accounts, send funds, connect your Ledger crypto wallet, and sign transactions on any DApp. Talisman also supports Ethereum-style accounts so you can manage assets and utilize DApps on Moonbeam, Moonriver, Astar, Acala’s EVM+, and others.

Software and Hardware Wallets: The Best Of Both Worlds    

So, now you know what a software wallet does, how it works and which kind of tasks they are perfect for. Now all that’s left is using one while considering the risks. 

Remember–using a software wallet without protecting it with a hardware wallet may put your funds at risk. Your assets are only as safe as your private key. If someone gets hold of that, they also have access to your crypto! 

Then, beyond that, even software wallets protected by hardware wallets can’t stop you from interacting with malicious smart contracts. The only way to truly stay safe is to do your own research, and stay vigilant.


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