The wallet is the essential tool for transferring value within the Bitcoin network: how it works and the different types of wallets.
The wallet is essential for sending and receiving transactions within the Bitcoin network. It is a software that allows the management of public keys, private keys, and addresses.
How does a wallet work?
The fundamental concept to understand is that a wallet does not contain bitcoin. Bitcoin, in the form of UTXO (Unspent Transaction Outputs), never move from the blockchain. What changes are the addresses to which the UTXO is associated and the keys capable of controlling them.
It would be better to think of it as a keychain rather than a wallet. The wallet’s task is to manage pairs of keys (one private and one public) and addresses.
The wallet has two main functions:
- it allows the creation of transactions that will then be sent to the network through the node to which the wallet is connected;
- it calculates the total balance of funds by summing all the UTXOs associated with the generated addresses. This information is obtained by querying the node, which gathers the necessary data by examining the entire blockchain.
Types of wallets
There are different types of wallets, each with its own pros and cons:
- Desktop Wallet: these are programs to be downloaded and run on your computer. In general, they are secure software, but it’s important to note that their security level depends mostly on the computer they are installed on;
- Mobile Wallet: these are applications downloadable on your smartphone. Similarly, their security level depends mostly on the device they are installed on. They are considered more secure than desktop wallets due to the lower likelihood of encountering viruses or malware on a smartphone compared to a computer. Along with desktop wallets, mobile wallets fall into the category of software wallets (also known as hot wallets);
- Hardware Wallet: these wallets store private keys on hardware devices. Since they are always offline, they offer a high level of security. Currently, it is one of the most popular solutions for safeguarding your bitcoin;
- Paper Wallet: generated offline on a secure computer, paper wallets store private keys on a piece of paper. In the case of a paper wallet, if the change in a transaction is not managed correctly, there is a risk of losing your funds. Today, they are considered an obsolete and insecure method for holding your bitcoin.
The most popular Bitcoin software wallets
Here is a list of the best Bitcoin software wallets currently available on the market:
- Electrum
- Wasabi
- Samourai
- Sparrow
- Blockstream Green
- Specter
- BlueWallet
- Simple Bitcoin Wallet
How to choose a wallet?
The choice of a wallet depends on your skills and personal needs. However, there are some considerations to keep in mind when making the choice:
- Prefer Bitcoin-only wallets: the more coins a wallet manages, the greater the likelihood of exposing yourself to risks due to the complexity of the software;
- Opt for open-source wallets: their source code is public and available for inspection, allowing you to verify the operation of the software;
- Support for the Tor network: choose a wallet that supports connection to the Tor network to increase your privacy when using Bitcoin;
- Coin Control option: a wallet with the Coin Control option allows you to select which UTXOs to spend in a transaction and limit the information visible to entities interested in tracking spending behaviors;
- Replace by fee option: some wallets allow you to replace an existing transaction with a new one with a higher fee. When the replacement transaction is sent to nodes, they replace the old transaction with the new one and transmit it to their peers.
