Wallets

A cryptocurrency wallet is a software wallet which allows a user to use cryptocurrencies in a similar way common to the way the FIAT wallet is used. The main purpose of the cryptocurrency wallet is to store private and public keys related to particular cryptocurrencies. The wallet shows the user's balance and enables to receive and send cryptocurrency.

An owner of a cryptocurrency wallet must authenticate himself before the balance is shown and manipulation with the currency is allowed. It is recommended to set up strong credentials and enable 2-factor authentication.

A cryptocurrency wallet provides users with a public wallet address which is used to receive cryptocurrencies. A user can publicly expose the wallet address and give it to a peer for sending cryptocurrencies to it. Some wallets are able to generate a new public address for every deposit transaction to achieve more anonymity.

Possession of cryptocurrencies is based on keeping private keys to digital coins. When a user receives a digital coin, a cryptocurrency wallet stores corresponding private keys in a secure and encrypted way. Coin private keys are associated with the wallet address and this is one piece of information which is stored in a blockchain.

A deposition and a withdrawal of cryptocurrency is carried out via so-called transactions. A transaction consists of the amount of cryptocurrencies to send or to receive, the wallet address of the sender, the wallet address of the receiver and often transaction ID‘s to uniquely identify the operation. A transaction ID is often generated by the wallet. There is more information in the transition but these are the most important and are visible by peers.

Transactions are processed by a cryptocurrency network which uses a so-called blockchain. Multiple transactions are acumulated into a block and confirmed blocks are added at the end of a blockchain. The blockchain is basically a linked database of confirmed blocks.

The transaction firstly is validated before it can be added to a block. If the transaction is valid it is added to a new block and then the network must confirm the block. The confirmation process requires a mutual agreement of the majority of nodes in the network to add the block into the blockchain. The confirmation often takes just a few seconds or minutes. However, in some rare cases, it can take hours.

There are more mechanisms of transaction confirmation. The first one is the so-called Prove of Work (POW) mechanism which is based on computing sophisticated cryptography tasks.

The second most used type is Prove of Stake (POS) which is often based on possession of a greater amount of coins and thus having a right decision. It is worth mentioning that most of the public blockchain offers web tools to monitor transactions.