"My bitcoin is right here in my hand, on my hardware wallet!"
Statements such as the one above are common, but not correct. Let's try to clear the misconception. Your bitcoin, or eth,or crypto is not in your hand. It's not in the hardware wallet. Nor is it in any wallet, offline or online, for that matter. It is on the blockchain.
Cryptocurrency cannot "be" anywhere—it isn't tangible. Think of your reputation, could you hold your reputation in your hand? Of course not, it's the compilation of others' views of you. It's out there in the world, not held anywhere.
"So, where is my crypto and what's a wallet for then?" Your crypto is on the blockchain, meaning, it is on the trusted ledger that everyone can see. Because everyone sees the ledger (the records), everyone knows that you own 0.01 BTC. The fact that this ledger is so open and transparent provides the trust that, yep, it's indeed correct and legit. In essence, that trust is the value that underlies all crypto.
Not to digress, but…sometimes crypto-naysayers argue that crypto has no value because it has no intrinsic value. Gold, they say, has intrinsic value to it. Yes, it does. You can make stuff out of gold or look at it 'cause it's pretty. But, where does the intrinsic value of fiat money (government-issued paper money) come from? Does fiat actually have any intrinsic value? The answer to whether fiat has intrinsic value is, yes, it does. It has intrinsic value because you could wallpaper your house with fiat money. Or, you could light a fire with fiat if you're low on kindling. What about monetary value of fiat money, where does that come from? It comes from trust, again. We trust that that piece of paper, because it has a government's name and a picture of somebody on it, and because, for now, other people assign value to it, we trust that, yep, that paper does have monetary value. And it does. For any crypto-purists who say fiat is worthless, okay, mail me your fiat now.
Back to your crypto "on your hardware wallet." What, then, actually is on my hardware wallet? Your private keys are what's stored on your wallet. Private keys are nothing but long strings of letters and numbers. That's it. More precisely, your hardware wallet stores a file. On that file is your private key string of letters-and-numbers. You could just as easily type the private key using Notepad then store that .txt file onto a regular USB drive…there you have an offline hardware wallet.
Here's an analogy for anyone who likes to think visually and conceptually:
Imagine a whole bunch of glass piggy banks sitting somewhere, let's say out in the desert. Just glass piggy banks doing what they do in the desert—sitting there, holding various amounts of money. Some have lots of coins, some little, some zero. Anyone who hikes through that desert can see the piggy banks and can see how much is in them. I don't know how this would happen, but suppose some coins zipped up out of one piggy and zipped over to another piggy bank. A hiker passing through that desert could watch this money-exchange happen and say, "Yessir, that first piggy lost money and that second one gained it." Somehow, a scoreboard would write down the subtraction and addition as well. The scoreboard has a printer on the bottom and keeps a running print-out of every transaction ever. This visibility is the public ledger. This is the blockchain.
Any hiker can see the values and the transactions. The hiker could walk over and read the scoreboard printout at any time. Plus, any hiker could drop some coins into any of those piggy banks if he or she wanted to. But, the most important trick here is that no hiker can get inside of those piggy banks. That is, unless they have the piggy bank key. That key, the private key, is held by the owner of the piggy bank. He or she can stick the key in, unlock that piggy bank, then send the coins to anyone else. Just as with a real, physical key to your house or car or safe deposit box, you need to protect that key.
So, your money is not in your hand or on your wallet, it's on the blockchain. In our analogy, your money is out there in the desert in one of those piggy banks. What you're holding in your hand is a long string of letters and numbers, the private key, that unlocks that piggy.
Originally published on http://satoshitimes.wikidot.com
May 8, 2018
LINK: http://satoshitimes.wikidot.com/blog:23
Although dated, this is being posted here on the Hive blockchain so that it's archived.