What is a wallet in NFT or Crypto or Web3 or DeFi world?
Your crypto wallet is where you can view your cryptocurrency assets and transactions, all in one place.
It’s also where you confirm any transactions in process.
Different wallets have different features.
But before we proceed any further, I hope you know what is NFT.
If you don’t then refer to this free guide on What is NFT »
Assuming that you know what NFT, and Ethereum Blockchain technology is.
Let’s move to the next step: Understanding custodial and noncustodial wallet!
To buy NFT, you need to have ETH in your digital wallet called Metamask.
So let’s understand what is Meta Mask wallet is and why we need it.
Wallets are like banks in the Web 3.0 age, and all the currencies you buy will go to your wallet.
Now to understand more about wallets, we will know about the two types of wallets: Custodial & Non-custodial wallets.
What are custodial wallets?
Custodial wallets are something where 3rd party will keep control over your cryptocurrencies.
Examples are CoinDCX, CoinSwitch Kuber, WazirX etc.
Please Note: All of the above are called exchanges and are Indian exchanges.
If you want to buy any kind of cryptocurrency, you need support from these exchanges to buy, sell and trade the currencies.
Just like: to do banking transactions, you need a bank account, similarly in crypto world you will need an account in any one of these crypto exchanges.
These exchanges are called custodial wallets!
But you can say that even though the currencies you buy are yours, i.e., you own them, but you still won’t be able to fully control them.
Think of it in this way: you don’t control a bank in which you have your money, right?
Similarly, you may own them for cryptocurrencies but can’t control them; you can just do your transactions just like you do INR transactions via traditional banks.
But when it comes to non-custodial wallets, you can take complete control and ownership of cryptocurrencies.
Basically, you will be your own bank!
Isn’t that awesome?
It will just be like you are going to a shop buying some stuff, and that thing you bought is entirely yours.
No 3rd party involvement.
Apps such as metamask, where we can buy, sell, and store currencies, are decentralized. Meaning it is not owned or controlled by any government.
You will have complete control of your account, and it is just like owning and even controlling your own bank.
Many people have this misconception that it can easily get hacked since it’s in control of 3rd party.
You own a Facebook / Instagram account; even that can be hacked.
But does that mean you will go off social media or never use a phone?
There is even risk in using the phone, as your data may get shared with the company.
But we still use it as we are habitual now.
And we subconsciously think that this is normal and we are secured.
Similarly, when it comes to a non-custodial wallet, it’s okay to use them, but you have to remember that it’s you who have all the authority and control now.
The security of securing your account is in you!
You pass the security burden to yourself, and you have to be fully equipped to store your private keys safely.
If you lose your private keys, you lose access to your cryptocurrencies too.
Let's assume that if you lose your private keys if you lose the seed phrase, or if you just miss out on even a single letter of your seed phrase of the noncustodial wallet, you are completely gone because you cannot recover it.
So it’s not like non-custodial wallets cannot be hacked or are safe; it’s just that we have to take 100% responsibility for what we do.
Everything worth will always have a higher risk.
It’s natural to fear as, in the end, it’s about money, and that’s why I always mention this: “invest what you can afford to lose.”
Now, since you have an idea about Custodial Wallets, i.e. CoinDCX, CoinSwitch Kuber, WazirX, these exchanges are easy to use.
You have to create your account and verify your KYC and bank to start buying and selling your cryptocurrency coins.
But let’s dive a bit deeper into Non-Custodial Wallets.
A non-Custodial Wallet is a piece of software that stores your public and private keys.
There are many types of Non-custodial wallets like Metamask, Coinbase, Bitski, etc.
But for now, we will take the example of Metamask.
This non-custodial wallet will allow you to send and receive digital currencies and check balances.
You can even have multiple wallets and transfer currencies within.
So it's like you own a Paytm or PayPal or Google Pay account.
Treat them as your non-custodial wallets.
And let's say you have a bank account with Axis bank.
So that is your custodial wallet. (just for an example)
Now, what are public and private keys?
These keys are helpful for sending and receiving cryptocurrencies.
A public key is something that is shared with the sender or receiver.
A private key is something that you just keep with yourself, as the name suggests. (and not share with anyone). The private key is connected with a public key using cryptography and acts as a digital signature for the transaction.
Now to understand further, I have divided non-custodial wallets into four forms:
1. Desktop
2. Mobile
3. Hardware
4. Paper
For the desktop form, we have a chrome extension for the Metamask wallet.
Again, here we are taking the example of Metamask because it is one of the finest noncustodial wallets right now, based on ethereum blockchain technology.
For the mobile form, we have a metamask application on our mobile (for android and ios).
I would recommend using the desktop version for any transactions you do.
But if you wish just to check your balance or transaction history, etc. the mobile version will be helpful.
For the hardware, a classic example is a company known as a ledger.
This ledger looks like UBC - Pendrive.
This hardware stores your private key safely.
And whenever you wish to use your seed phrase or key for any transaction, you just need to insert the hardware.
The paper form doesn't have to be an application software or USB, etc.; it’s an actual A4 size paper.
So, when you create a noncustodial wallet or meta mask account, it will give you a password known as a seed phrase.
Now, this seed phrase is around 60 characters/letters long, and the phrase is words.
Now, these words need to be stored with you very very securely.
Hence, I keep all my seed phrases in A4 paper so I don’t lose them.
If you lose the seed phrase EVER, you will lose your entire noncustodial wallet (meta mask).
Now, should you use non-custodial or custodial or Both?
The answer is both; you require both of the wallets.
And once again, I'm talking in terms of Indian context; you need both.
To explain it a little more, you need to buy and sell coins through exchanges like Coin DCX.
Let’s assume you have purchased Rs. 10,00,000 worth Ethereum.
Now Rs. 10 lacs is a significant amount in your custodial wallet, which is Coin DCX.
You can directly further transfer it to your noncustodial wallet, which is a metamask with a click of a button.
Example of sending 1.82 ETH from Coindcx to some other wallet.
Now, if I further talk about metamask, it acts as a bridge.
Because metamask enables you to use all the decentralized applications hosted on the Ethereum network, for example, Open Sea Rarible, which are like two of the largest NFT marketplaces.
Without using an interaction bridge-like meta mask, your browser would not be able to access the Ethereum blockchain, or you won’t be able to buy, sell or create NFTs!
That's all for WALLETS :)
I hope that you must have got some basic idea about what wallet is!
JorrSummary:
1.) 2 types of wallets: Custodial & Non Custodial
2.) It is recommended that u invest in coins through custodial wallets & then transfer them to non custodial wallets. NFTs & Dapps are integrated with non custodial wallets.
3.) Invest as much as u can afford to lose.
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