I WAS SHOCKED. I mean, genuinely shocked. My good friend, the person that introduced me to the world of blockchain and cryptocurrencies almost 11 years ago, the person who showed me how to set up a CEX account, how to buy BTC and ETH, the person who showed me how to set up Metamask and load it full of alt-coins bought because of FOMO, the person whom I looked up to as the grandfather of crypto, had no idea how a blockchain wallet worked.
I mean, he knew how to add a token to his wallet, how to approve a transfer, the vital need to keep his private key, well, private. But he didn’t know how a blockchain wallet actually worked. And it was causing him some stress. He called me in a mild panic. A new token was launching in 30 min – he wanted to get in and buy on the ground floor – but he had moved his ETH to a new Trust Wallet that he had on his phone, and had forgotten to bring that phone with him to the office.
Could I send him some ETH to his Metamask wallet so he could buy the tokens? I said sure, but he did realize that he could access his ETH from his Metamask on his computer by just adding his address to it. Right? The 56 secs of silence made it clear that no, he did not realize that. This experience is not an outlier in the blockchain world. Ever since that eye-opening revelation, I have encountered many people who do not understand how a wallet works.
And like my friend, a lot of them are seasoned, long-term crypto veterans who have been involved in the space for years. And if these people don’t understand the mechanism, how can we expect to bring new people into the fold and have them understand it clearly? I think the issue starts with the name: wallet. I get why the fore-fathers used the name: it represented the traditional imagery of “keeping” your money in a secure location, and having it accessible to buy cool stuff with.
They wanted something that people coming into this new and exciting space could identify with, to make it easier to transition in on the steep learning curve. The problem is that this isn’t actually how a blockchain wallet works, and a name that better describes what it actually does would go a long way in helping us understand what these wallets are.
However, fast forward 13 years, 300 million crypto users, and 18,000+ crypto-accepting businesses, and well, it is a bit difficult to change the vocabulary. So, if we are keeping the name, let’s at least learn what a wallet is, how it works, and some differences between different wallet “types”.
Before we start, let’s get some connotations out of the way. When I say wallet, I mean things like Metamask, Trust Wallet, Phantom Wallet, etc., either a browser extension or mobile app that you access through your device. Okay, with that out of the way, let’s get going. A wallet is two things: 1) it is a list, and 2) it provides access to transfer tokens to other wallet addresses. It is a list – a wallet shows you what tokens are owned by a particular address.
In this way it is no different than going to a blockchain explorer, typing in the address, and viewing the owned tokens. In fact, for any Metamask user out there, you know that in order to see that new 389% APY-paying alt-coin token that you bought at 3:17 am this morning while taking a break from Call of Duty: Vanguard, you must first add the token address to your wallet address. Your wallet will organize all your tokens, and show you the amount of each that you own.
It provides access to transfer tokens – most people do not interact directly with a blockchain themselves. This requires spinning up a node, having a copy of the blockchain on their computer, maybe even being a validator. This is out of reach of 99%+ of blockchain users in the world, and frankly, who wants all that hassle just to send your grandma some Shiba Inu. This is where the wallet comes in. It acts as your web3 portal so you can make and pay for transactions – i.e. send tokens – securely on a blockchain. It accesses a node, and uses the language the node understands so it knows exactly what to do on your behalf. It does all of this securely while protecting your private key to exposure. That is it.
A wallet does not “hold” anything. There isn’t actually anything “in” a wallet. Again, it only shows you what tokens your wallet address controls. Wait, what? My tokens aren’t in my wallet? Nope. Tokens actually stay inside their contract where they were created, and never leave. They just get assigned to a wallet address when they get transferred. Wait, what? My tokens don’t move around? Why the heck do they call it transferring then? I think it again comes back to familiarity.
And transferring sounds a heck of a lot better than assigning. Okay, let’s look at it this way. Think of a blockchain like a huge bank building, and let’s use Ethereum as the example. When it is created, or built, they include one central vault in the building. In this vault is an unlimited supply of deposit boxes, a robot, and a pile of materials to make the chain’s native currency, ETH. The only access to this vault is a tiny speaker; nothing can come in or out.
If someone wants to send some ETH from one address to another, they need to go tell the robot to make the transfer. When they do, the robot will check to make sure the sender address has enough ETH and that the request actually came from the sender and not an imposter, and if so, he will move the ETH from the deposit box with the sender’s address on it to the deposit box with the receiver’s address on it.
But the ETH never actually leaves the vault. All it does is get moved around inside of it from deposit box to deposit box. The issue that comes up is, how do you communicate with the robot? You see, he only will speak to other robots that he recognizes, and it only speaks a certain language that is very complicated. So this is where your wallet comes in. It acts as the go between, you to the robot and back again. It takes your requests, translates it to the robot’s language, shows its pass to the grumpy hall monitor guarding the bank building entrance, and goes in and tells the ETH robot what it wants it to do.
Once it is done, your wallet takes the receipt from the robot, comes back outside, updates your list of token amounts and pastes the receipt there for you to see, and then kicks back with a mojito, chillin’ until you have another request for him. Whenever a new token is created on the Ethereum blockchain, a new vault is constructed, with the supply of deposit boxes, the pile of tokens, and a robot inside, and a tiny speaker for communicating with the robot.
And the same process occurs anytime a request to transfer that token occurs. Tokens just get moved around from box to box, never leaving the token contract vault. Okay, great. I get all that. But what does it mean? There are a few key points that come out of that:
They all do the same thing. You like Metamask? Great. Trust Wallet fanboy? Go for it. You wanna make your own wallet? You go girl.
You can control the same tokens from multiple wallets. If you have an address in Metamask on your laptop but you want to use Trust Wallet on your mobile device, you can export the private key from your Metamask address and import it to Trust Wallet. Bang, you now can see and control your tokens from either device, and both will be updated regardless of which wallet you use to complete transactions.
Do you have the need that multiple people in your organization require the ability to make payments for services by sending crypto from the organization’s wallet to vendors? Easy, just export the private key and import it to each user’s wallet and they now all have access to the funds to pay vendors.
The only difference between custodial and non-custodial wallets is who has the control of permissions and making the requests for transactions. Other than that, everything else works exactly the same in accessing the blockchain.
Cold-wallets, like Ledger, work exactly the same, just with the added security feature of requiring a physical access device hooked to your computer/mobile device in order to verify your authority. SO THERE YOU HAVE IT. A short primer on understanding what a blockchain wallet is, what it isn’t, and what it can do. Now you are ready to be the life of the party. Or not. Either way, the more we can educate about what blockchain is, and clear up the confusion that surrounds it, the further along we are to getting mass adoption out there. And that, I believe, would be a really great thing.