Types of wallets

There are a few different types of wallets. Below you'll find more information surrounding digital wallets.

Custodial vs. Non-Custodial Wallets

Wallets can be classified as being a custodial wallet or a non-custodial wallet. With a custodial wallet, another party has control of your private keys and therefore your assets. A common example of a custodial wallet is an exchange wallet. Although custodial wallets are often viewed as less secure, some people prefer them as they require less responsibility to take the precautions needed when using a non-custodial wallet.

For example, while you’ll be able to reset your exchange account password if you forget it, losing your password or the seed phrase of a non-custodial wallet could result in permanently losing access to your assets. With non-custodial wallets, you have control over assets without the need to trust a third party. You are the only one with access to your private keys and are responsible to keep them secure and to ensure you would be able to regenerate your wallet if needed. An advantage of a non-custodial wallet is you are able to do whatever you want with your assets.

For example, you may want to make a large trade for a token on a decentralized exchange. If you were holding your assets in a custodial wallet on an exchange account, you may not have access to all of your assets right away as many exchanges impose withdrawal limits within a given time period.

Hot and Cold Wallets

Wallets can also be classified as being a hot wallet or a cold wallet. A hot wallet refers to any digital wallet that stores the keys to your assets and is connected to the internet. It is generally easy to set up and quick to use but may be vulnerable to hackers that could steal your assets. Examples of hot wallets include Mobile, Desktop, and Web wallets.

Mobile wallets offer the advantage of portability, enabling you to make transactions from anywhere. Desktop wallets often have built in useful tools such as portfolio charts. Web wallets allow you the convenience of interacting with your Ethereum account via a web browser. While web wallets are considered the least secure, all hot wallets are at risk of online attacks. For this reason, users typically will not keep a large amount of their funds or other valuable digital assets in a hot wallet. A cold wallet is more secure as it is not connected to the internet. A hardware wallet is an example of a cold wallet. Although it needs to be connected to your computer when you use it to sign for transactions, your private keys do not leave the device. This protects your assets from the threat of potential malware that can be on mobile, desktop, or web browsers that may try to steal your private keys or recovery seed phrases.

While hardware wallets do add an inconvenience of having to be connected to your computer before you are able to make transactions, they are seen as the most secure way to store your digital assets.

For more information about digital wallets click here.

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