Wallets? Wtf?
So you have bought some crypto on an exchange like CoinSpot or Bittrex and you've heard stories about hackers stealing people's coins...it's about now you start to wonder where your coins are actually stored and how to keep them safe. The answer is wallets!
There are lots of different kinds of wallet it's understandable if you are confused. So, rather than explain the specifics of ERC-20 tokens and smart contracts, I'm going to give you a few simple analogies that you might find useful.
What Are Wallets?
In the real world we have real coins and they are kept in real wallets (often leather or velcro) so it makes sense that digital coins are kept in a digital wallet... but some coins need to go into their own special wallet and unfortunately they aren't all compatible. For example, if you send Bitcoins to an Ethereum wallet they could be lost forever...and that is not good!
"That's too confusing, I'll just leave them on the exchange..."
^^^^^^^^^^^^^^^^^^Don't be this person!^^^^^^^^^^^^^^^^
Pictures Make Everything Easy!
Let's pretend Bitcoins are AFL trading cards! You remember those right?
And you would keep them in an AFL folder so you didn't lose them! Think of this folder as a Bitcoin wallet.
After Bitcoin came Ethereum, let's pretend Ethereum are Tazos.
Tazos (Ethereum) aren't the same size as your AFL cards (Bitcoin) so they need their own folder!
There is nothing stopping you from swapping AFL cards for Tazos or vice versa, they both have some sort of value and you can negotiate a trade with someone else. But they need to be stored in the correct wallet! You can't get an AFL card and try to squash it into a Tazo folder, it just wont work! In fact, you will wreck the card if you try and it will be thrown away.
Follow me so far?
I hope so, because this is where things get a little more complicated.
Ethereum is a type of 'token' but there are a lot of other tokens based on Ethereum and they can all share the same wallet because they are the same size and shape... just like Tazos!
First there were Looney Tunes Tazos (Ethereum), but other companies quickly discovered it was a great idea and released their own versions like Pokemon, Simpsons & Star Wars (tokens like OMG, PAY & CVC for example).
You should keep them on separate pages so the different types don't get mixed up, but those pages can all go in the one Tazo folder (Ethereum wallet)!
Hot or Cold? Digital or Paper? So many choices!
If you keep your coins in an exchange this is referred to as an online wallet, web wallet, or hot wallet. It's not very secure and I wouldn't recommend it for long term storage.
The schoolyard analogy for this one would be... your teacher is like an exchange, your Tazo folder stays on their desk and whenever you want to trade them with your classmates you tell your teacher which ones you want to trade and they will do it for you.
The bad thing about this is that one of the more mischievous kids could potentially steal your Tazos, they are just sitting there after all...if they watch the teacher carefully enough they can time the theft perfectly and never be caught.
Another option is a software wallet. This is where you download specific software so the wallet is on your PC or Mobile Phone.
This is more like carrying your folder around with you. If you want to trade all you have to do is open the folder, pull out some Tazos and pop them into someone else's folder. It's more secure than leaving them with your teacher, because only you have the power to remove Tazos. But it is still not 100% safe... in this analogy you could leave the folder sitting somewhere, or you could misplace it, and someone could steal every last one.
A safer choice is a hardware wallet like a Tresor or a Ledger Nano S. These are like USB drives that hold your coins and they are incredibly safe. Probably one of the best options if you have a lot of money invested in crypto.
You can picture these like a metal briefcase with a combination lock. You can carry it around with you, nobody can touch your Tazos unless you unlock it with your code, and even if you accidentally leave it somewhere or a theif steals it right out from under you....they can't get in! And the best part? You can keep a backup at home, so if the case is lost or stolen your Tazos can be recovered!
Finally there are paper wallets which are exactly how they sound - a piece of paper. You can either write out a long string of nUm8Ers aNd L3tTeRs with a trusty old pen or you can save time and print it out from your computer. These usually go hand-in-hand with an online wallet (like MEW for example) but if the paper is lost, and you don't have a photographic memory, there is no way to recover your coins.
This is kind of like your leaving your Tazos at home with your mum and carefully writing down on a piece of paper how many Tazos you have and what kind they are. It's great if you want to store them away for a long time, they will be nice and safe at home! But it can be a pain in the butt if you want them handy to trade with your friends.
Public Keys? Private Keys? Where is the lock?
This is the last important thing we need to cover. I may have mislead you earlier when I said your coins are stored in YOUR wallet (whether it's on an exchange, on your phone, or even on a hardware wallet)...they aren't really ON your device at all! That's just where the keys are stored!
Your coins are actually always stored online (in a public ledger on the blockchain - but I won't cover that right now) and they can be accessed with a "pair" of keys. One of these keys is a public key and one is a private key.
Imagine your wallet is actually a glass room in a city full of glass rooms.
The public key is simply the address of the wallet. Anybody who has it can walk up to it and look straight inside and see exactly how many coins are in there. These glass rooms have a little mail slot too so anybody can put coins in... but they can't go inside.
The private key lets you unlock the door and enter the wallet, and once you are inside you can touch the coins and send them off to other wallets or trade them for different coins.
If you keep your coins on an exchange then you only have access to the public key. This allows you to deposit coins, but if you want to trade with them it's like you are giving instructions to and exchange employee who will go inside and complete the task for you. You see why this isn't very safe? What if somebody else follows them inside? What if they accidentally give away the private key?
What Now?
-Get yourself a wallet or wallets (depending on which coins you have)
-Hold your own private keys and make sure nobody else has access to them! It's a good idea to make a paper backup no matter what sort of wallet you have!
-Hardware wallets are the best, but if you are happy with a software wallet or an online/paper wallet like MEW then you should make sure you have a good antivirus/malware set up. You don't want anybody sneaking a peak at your private keys when you type them in!
Good Luck!
I hope I was able to help some of you understand wallets by giving you a slightly different perspective on things!
I would really appreciate if you could give me an upvote!
If you are feeling generous and want to give me a tip... who am I to refuse such a kind gesture? My Bitcoin and Ethereum public addresses are below, feel free to send some love my way!
BTC - 15GDfQY6Xy6uxbVtpSu41krzy1vpZRUxLX
ETH - 0x720655eea5706724fb99e2c79976b09af31d8219
Until next time...