How do cryptocurrency purses or wallets work?
As we already mentioned, cryptocurrency wallets or purses are one of the most important and indispensable elements when it comes to operating with them. This because of They are the ones that allow us to send or receive payments in crypto assets.
Unlike the traditional financial system, Bitcoin and other cryptocurrencies are fully digital currencies that do not exist in the physical world and work based on cryptography. Therefore, the design of the wallets is of vital importance to be able to operate and manage our funds. And although, the term wallet seems similar to the one we use to store our physical money, the truth is that in cryptocurrencies, what is really stored in wallets are public and private keys.
Cryptocurrencies as such do not exist as currencies, but rather as records of transactions contained within a blockchain that is operated by nodes.interconnected with each other around the world. So, the public keys and above all, the private keys within a wallet are what give us the ownership and right over the cryptocurrencies transferred to a particular address. Let's look at this in more detail:
- La public key It is similar to a bank account number. We can deliver it to anyone to send us money, without the risk that they can withdraw our funds. Through the public key, addresses are generated to receive, consult and view the status of our funds.
- La private key It works as a kind of key, PIN or password which we should not reveal to anyone, since it gives us the right to spend the cryptocurrencies contained in an address. Thus, the owner of the private key will be the owner of the funds and will have full control over them.
How wallet security works
Wallets or purses use advanced blockchain encryption techniques to grant and guarantee total security to users. In this way the wallet can save, send and receive cryptocurrencies without greater risk.
At the time of setting up a wallet, the first thing is to create a private key using a secure algorithm. For example, through the algorithm ECDSA using the elliptic curve secp256k1. Or you can also use the algorithm EdDSA. In either case the goal is to provide a high level of security. This is because both methods allow the creation of almost infinite combinations and with a high degree of difficulty. This makes them practically impossible to guess or to be attacked by force.
After the generation of the private key, the public key is created, which is mathematically related to the first. And from the public key the addresses where we can receive cryptocurrencies are generated. However, it is important to note that although the public key is generated and related to the private key, the reverse process cannot be done. That is, we cannot deduce the private key from the public key, since the algorithm used for creation is one-way.
Likewise, there are deterministic wallets (HD wallets) that when you configure them for the first time, they generate seedFrom which all the keys and addresses are generated. Later it will serve us to restore, recover the wallet and our funds in case of damage or loss of equipment. These seeds are a kind of code that is represented by mnemonic words generally in English. In order to provide greater ease when making backup copies.
As a curious fact, it is important to note that the public and private keys generated in a wallet are not related to the cryptocurrency protocol. If not rather, take shelter within the hardware that operates them and never leave the device. However, the level of security provided by a wallet will depend on the type that is being used, be it a hardware wallet, paper wallet, light wallets, desktop software, tablets o smartphone, or online.
What are cryptocurrency wallets for?
As a bitcoin and other cryptocurrency systems are completely decentralized, there is no entity or body that controls them. It is because of that wallets play a very important role in this ecosystem. They are a piece of basic infrastructure that allow us to trade cryptocurrencies. In them we can see and consult our balances, in addition to the operations carried out and received. They also allow us to operate our funds with absolute control over them. We do not need the permission or authorization of any third party to perform a transaction.
In addition to providing us with security and confidence to carry out our operations, wallets also allow us to sign transactions without the need for private keys to leave the device. When we send a shipment to a person, we are transmitting a value in the form of a transaction. Therefore, we are transferring ownership of a certain amount of money to that person. In order for the network to confirm the transfer and the recipient can use the funds, a digital signature is required. Thus it will be verified that the person who performs the operation owns the funds and not a third party.