We begin this guide with an introduction to decentralized applications and cursorily touch upon Blockchain model.
When a transaction occurs between parties in a traditional application, there is a mediator(like a bank) which oversees the validity of this transaction. However, in decentralized applications, this mediator is not present and the transaction goes through directly between stakeholders.
But how such a transaction which eliminates a mediator be checked for validity? This is achieved by setting up a public distributed ledger which is technically called Blockchain.
The blockchain is the ledger which is available to each node(computer/device) in the Blockchain ecosystem which will not allow invalid transactions to go through.
The blockchain is a collection of blocks arranged in sequential order with most frequent blocks being appended to the already existing collection. Each block consists of a collection of verified transactions confirmed to be genuine.
Understanding Public key(address) and Private key
In decentralized applications, when we transact between individuals, we need to identify an individual to whom we want to send funds. This identification is in the form of public key or address.
The public key identifies a unique individual while maintaining anonymity(no personal details revealed). Each in the Blockchain ecosystem must have address or addresses if they want to receive funds.
Similarly, if we want to send funds from our account to another, we need to have a private key for the obvious security reasons. This private key is accessible only to us and no one can falsely tamper our account by stealing funds without the private key.
Understanding cryptocurrency wallet
With the preceding introduction to public and private keys, we need to understand now that we need an infrastructure to house our address or addresses and their corresponding private keys. We also need the facility to store cryptocurrency balance associated with each address.
Cryptocurrency wallet provides such a facility. Cryptocurrency wallets are software programs that store public and private keys and interact with blockchain to enable a transaction between stakeholders and monitor balance.
Types of cryptocurrency wallets
Cryptocurrency wallets are broadly classified into three types – software, hardware and paper.
Software wallet: Software wallet is further classified into a desktop, mobile and online. Desktop wallets are normal desktop applications installed on a PC or laptop. Mobile wallets are mobile applications.
Online wallets are cloud applications that are accessible from any location.
Hardware wallet: Hardware wallet are dedicated devices that are by default not connected to the Internet and serve the only purpose to save keys. They are generally made online by connecting to a system(for example through USB) and using an application for making transactions.
Paper wallet: As the name suggests, using a piece of paper to store public and private keys and using the need-based entry to make transactions.
Desktop software wallet: There are several desktop wallets, some prominent ones being Exodus and Jaxx. These desktop wallets are generally available for Windows, Mac and Linux.
They require download and installation prior to usage. There will be minor changes in the usage between applications, but the general principle is the same.
Create accounts(which creates the public and private key) and transfer funds to vendors or users by using their address.
Mobile software wallet: Edge is a popular mobile wallet available on both iOS and Android platforms. Users need to install the app available from respective app stores and avail the facility to create accounts and transfer and receive funds.
Online software wallet: CoinPayments is a great site which offers the facility of online wallet. Users have to login into their account and start transacting.
Hardware wallet: Ledger and Trezor are two capable hardware wallets. These wallets are connected to a PC or laptop via USB and some applications need to be installed to interact with these devices.
They can make transactions using their respective applications(for example myTrezor is used as the interface with Trezor devices)
Note that several of these wallets support multiple cryptocurrencies and not just Bitcoin.
Approach to use cryptocurrency anywhere
A general intuition should have flashed to the reader from the previous discussions on how to use cryptocurrencies anywhere to purchase goods and services. It is evident that any form of cryptocurrency wallet is essential to make transactions.
Funds can be added to personal wallets(off-exchange wallet) from exchange wallet which is created when a user buys cryptocurrencies from an exchange. Likewise, the off-exchange wallet can be funded from transfers between users or from the same user(different wallet).
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Although cryptocurrencies offer maximum security, they are often vulnerable to hacking and the user has to be cautious to exercise measures. Some common precautions are:
- Backup the wallet
- Keep software updated
- Add additional layers of security
It is evident that using cryptocurrencies anywhere has been made seamless with the numerous options available for crypto-wallets. The user has to carefully construct a study and choose a wallet that is best suited for their purpose, considering security aspects.