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What is a cryptocurrency?1 2

A cryptocurrency is digital money that is
secured using cryptography. The most popular cryptocurrency is bitcoin.
Although it has been artificially made, due to its security and anonymity
features it has shot up in value. At the time of writing, 1BTC = 11,421.69$. 3

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What is a bitcoin wallet?

A bitcoin wallet is the user interface between
the bitcoin system and the user.

 

Since the system of transactions is
decentralised, it is transparent and everyone knows about every transaction.
The bitcoin system is such that no trust is required. A group of strangers
manage each others financial transactions.

 

Sending and receiving money in bitcoin
involves two types of keys: private and public. A key is simply a random word
of a specified length. The private key is used to sign the transaction with a
digital signature which is unique to the transaction and the private key. The
public key is known to everyone and is used to check if your signature is
authentic and thus verify the transaction. The sign depends also on the message
so it is different for every transaction and any change in the key leads to
change in the message and vice versa so tampering with either is difficult.4 5

 

A bitcoin wallet is like a keychain that holds
all your public keys. A bitcoin wallet address is a mathematically computed
version of your public key. 6

 

Bitcoin is anonymous but it is completely
transparent and trackable. Some transactions and public keys can thus be
identified as belonging to the same person and may violate the privacy of the
individual. Thus ideas to take anonymity further as implemented in the
crowdfunded Dark Wallet were developed. 7

How do transactions work?8

A transaction tells the network that the owner
of some bitcoin value has authorised the transfer of that value to another
owner. The new owner can spend it by creating another transaction that
transfers to another person and so on. This creates a chain of transactions
that proves ownership.

 

Each transaction contains one or more “inputs”
which are previous transactions to the owner of the transaction and are proof
of the fact that the person has enough money for it.

 

Such transactions form a chain where the
inputs of the current transaction are the outputs of some previous
transactions.

 

Any node that sees a valid transaction that it
has not seen before will forward it to all other nodes so that it gets
recognised and the transaction can be completed. (flooding)

 

Transactions are bundled into blocks, which
take a lot of computation to prove but very little to verify. This verification
process is called mining. Mining nodes validate all transactions. Mining also
creates new bitcoins in each block, this is fixed and diminishes with time.

 

This transaction is now not yet committed to
the chain of ledgers in the world. Each node maintains a pool of unverified
transactions. Miners construct new blocks and add uncommitted to the block and
then try to prove the validity of the block. These are prioritised by highest
miner fee.

 

Spending the transaction is as simple as using
it as an input for another transaction.

Types of wallets9

Bitcoin wallets according to platform:

–      
Desktop wallets are accessible only on the
computer on which it is installed and provide complete autonomy and control of
funds.

–      
Mobile wallets are easy to use and do not take
up too much space.

–      
Web wallets are accessed through a browser and
stored and operated by a third party. One gives up control for greater ease of
use in this scheme.

–      
Hardware wallets are extremely secure and self
contained on special purpose hardware.

–      
Paper wallets are printed QR codes for public
and private keys.

 

Wallets depending how they interact with the
network 10

–      
Full node clients store the entire history of
bitcoin transactions, manages wallets, and can initiate transactions. They
provide complete autonomy and independent transaction verification

–      
Lightweight clients offer simple payment
verification, connects to full nodes for access to information, but stores
wallet locally and create validates and transmits transactions.

–      
Third party API client interacts with bitcoin
through a third party system of APIs. The wallet could be stored by user or
third party but all transactions go through the third party.

 

Wallets based on number of signatures

–      
Single signature wallets require only one
private key to send funds, that is, only one person verifies transactions.

–      
Multisig wallets are like joint bank accounts in the sense that two people need to sign
a transaction before it can be sent out. Thus we prevent a single person’s key
from being able to compromise a wallet. 11 12

 

While some wallets are single currency, others
are multi-currency which means that you can use the same software for multiple
cryptocurrencies.

 

Wallets based on key generation techniques:

–      
Deterministic: Each key is generated based on
a single master key called the seed. Only a single backup at the time of
creation is required.13 14

–      
Non-deterministic:
Each key is independently generated and is random which means that we need to
take frequent backups or reuse addresses to be able to remember all the keys,
which reduces security.

 

To help keep your own wallet secure: encrypt
it, take regular backups, procure a multisig enabled wallet and/or store your
keys offline.15

Benefits of using wallet 16 17 18

Wallets are open to everyone. The software can
be installed worldwide. They don’t require identification and are anonymous,
provide full autonomy over your money, and don’t require you to trust a third
party.

 

Transactions are broadcasted in seconds and
become irreversible within an hour. They do not require personal identification
so they are suitable for the privacy conscious. Nevertheless the basis is
opensource and public so every transaction can be publicly verified and there
are mathematical safeguards against unverified transactions.

 

Since the bitcoin system is decentralised, no
one can block or manipulate transactions.

 

Transactions are not reversible but there is
still consumer protection. Merchants cannot add service charges without
consulting the customer, so there are no hidden fees when it comes to bitcoin.

 

The system is online and available 24 hours a
day, 365 days per year. Transaction costs are much lower than with conventional
currencies.

 

This is usercentric technology that is fast,
secure and anonymous. It emancipates individuals from the government and from
banks who cannot be trusted to do what’s best for the client. Bitcoin and other
cryptocurrencies ensure that this is the case and that the merchant-consumer
relationship is transparent and safe.

Different wallets available: 19 20

Some of the most popular wallets are:

–      
The original Bitcoin Core: It is a
full node and is for desktop.

–      
Mycelium for mobile: It affords
privacy and is free and opensource.

–      
Trezor and Ledger Nano are
hardware wallets that are multi-currency and secure. They are HD wallets and
are similar in functionality.21

–      
Green address is a user-friendly
multi-platform bitcoin client. It is multisig but a third party must be present
for transactions to occur.

–      
Blockchain.info is a beginner
friendly web and mobile based bitcoin client.

 

Wallets are generally secure: web wallets are
most vulnerable to attack and hardware wallets are the least.

Backing up your wallet, keeping your client
and system software up-to-date and adding extra security layers like good
passwords and two factor authentication and additional pin codes helps to keep
it more secure.

1  http://cryptocurrencyfacts.com/what-is-a-cryptocurrency-wallet/

2 Bitcoin
and Cryptocurrency Technologies: A Comprehensive Introduction. Princeton
University Press, Princeton, NJ, USA. Chapters 1-4.

3 https://bitinfocharts.com/ (as of 18 January 2018)

4 http://www.imponderablethings.com/2013/07/how-bitcoin-works-under-hood.html

5 http://chimera.labs.oreilly.com/books/1234000001802/ch04.html#private_public_keys

6 http://www.dummies.com/software/other-software/bitcoin-public-private-keys/

7 https://www.darkwallet.is/

8 https://www.makeuseof.com/tag/how-does-bitcoin-work/

9 Andreas M. Antonopoulos – Mastering Bitcoin:
Programming the Open Blockchain: Chapters 1,2,5

10 https://www.mycryptopedia.com/full-node-lightweight-node/

11 http://cryptorials.io/bitcoin-wallets-explained-how-to-choose-the-best-wallet-for-you/

12 https://en.bitcoin.it/wiki/Multisignature#Multisignature_Wallets

13 https://bitcoinmagazine.com/articles/deterministic-wallets-advantages-flaw-1385450276/

14 https://en.bitcoin.it/wiki/Deterministic_wallet

15 https://www.coindesk.com/information/how-to-store-your-bitcoins/

16  https://www.forbes.com/sites/investopedia/2013/08/01/how-bitcoin-works/#1cd9f66f17ff

17  https://en.bitcoin.it/wiki/Main_Page

18 https://decentralize.today/5-benefits-of-cryptocurrency-a-new-economy-for-the-future-925747434103

19 https://blockgeeks.com/guides/cryptocurrency-wallet-guide/

20  https://blockgeeks.com/guides/cryptocurrency-wallet-guide/

21  nasdaq.com/article/bitcoin-hardware-wallet-review-ledger-may-have-caught-up-to-trezor-with-nano-s-cm679849

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