Last week's intro to this series pointed out some key differences in the log-in mechanisms for Web1.0 and Web2.0 because we wanted to set up the discussion about how Web3 sites will have you connect. Web3 websites ask you to ‘connect your wallet.’
Many that are still unfamiliar might ask what exactly this means and our intention in this post is to introduce you to the concept, offer some guidance to set one up, and offer a free POAP (NFT Proof of Participation Protocol) to the first 50 of you that get it set up and claim one. As we wrote in our last volume, “If Web1 was Read and Web2 Read/Write, Web3 is Read/Write/Own. The ability to own digital assets, and control digital identity, without reliance on any of the big tech services, has been made possible by the emergence of peer-to-peer networks keeping immutable public ledgers on a technology called blockchains.” Wallets then are used to communicate with blockchain networks to safely access, send, and receive crypto funds or assets. Simply put, the wallet stores your crypto just like traditional wallets store your cash and credit cards.
Where things get interesting is in the storage mechanism. Unlike fiat money — aka USD, CAD, etc. — which you store in a bank, crypto assets are stored on the blockchain, which is fundamentally an immutable public ledger. Just like you use a debit card to access your paper money at an ATM, you use your crypto wallet to access your crypto on the ledger. The crypto wallet does not actually hold physical items — instead, it holds unique digital passwords or “private keys” which allow you to transact on the blockchain. Wallets come in the form of devices, mediums or smartphone applications and help you access records of transaction history that are held on the ledger. Simply put, if you want to actually sign into a Web3 site or use your crypto, you’ll need a wallet to do so.
First, we need to clarify the two broadest categories of crypto wallets and make sure we have an understanding of the difference between custodial and non-custodial wallets. They are both good and arguably necessary given the current regulatory landscape within which we find ourselves in, especially in the United States. If you have ever bought crypto, the odds are that you made that purchase on a centralized exchange like Coinbase. Centralized exchanges are basically marketplaces where you can buy, sell and store a variety of cryptocurrencies. Most of you have probably heard of Coinbase, one of the most popular centralized exchanges in the United States and a great option for beginners! Exchanges like Coinbase are known as “custodians” because they have custody over your cryptocurrency. In other words, when you make purchases with the Coinbase app, Coinbase holds your crypto for you in its own “custodial” or “hosted” wallet. This way, Coinbase acts as a third-party with ownership of your private keys, and you are trusting the platform with the responsibility of keeping your crypto safe and secure.
Custodial wallets are a convenient gateway into the crypto world. It’s as simple as signing up for a Coinbase account with your email address, verifying your identity with a photo ID, choosing a strong password and linking your credit card or bank account to start buying. While Coinbase is great for holding small amounts of crypto and buying major cryptocurrencies such as bitcoin and Ether, these are not the kinds of wallets you can use to sign into Web3 sites and they also do not yet offer NFTs, though that is just around the corner!
A common refrain in crypto communities is “not your keys, not your crypto,” pointing out that the centralized custodian is the one who technically owns the crypto even if they are keeping a private ledger that faithfully credits you with whatever portion of that holding your account says you own. The worst version of this would be exchanges like Robinhood which will not even allow you to use or send those coins anywhere! Any crypto held in such account has been stripped of any of its utility and is only a kind of leased asset for traders who only care about ‘number go up or down.’ This is one of the reasons we recommend using Coinbase for your exchange. However, if you want to maximize utility, be able to connect to Web3 sites, or purchase NFTs, you’ll need to have what is called a non-custodial wallet.
A non-custodial wallet is what you need to gain sovereign control over your crypto assets and identity without any third-party involvement. Setting up a non-custodial wallet gives you access to your own public address and private keys. This is ideal for security and control and it also brings great responsibility as there will be no entity to appeal to if you lost your key.. Web3 gives you full autonomy and responsibility which is what makes it so revolutionary. It is also what makes it crucial that it is handled with proper caution and respect, especially when getting started.
The following is an explanation about how these wallets work using a combination of public addresses and private keys. Then we will offer a quick overview of the types of wallets one might choose to use and finally we will offer a bit of instruction for setting up your own non-custodial wallet.
HOW THEY WORK
Every cryptocurrency wallet functions using public keys and private keys. These keys work in tandem to make secure and verifiable cryptocurrency transactions on a blockchain.
Keys and Addresses
Wallet addresses are derived from a public and private key pair, and identify your account on the blockchain, thus allowing you to receive crypto. Think of an address like an email address — you can share it anywhere! Whoever knows your address can send you crypto. An Ethereum address will always start with 0x and then a string of 40 alphanumeric characters. It may also appear as a scannable QR code.
Private Keys & Seed Phrases
Every public key is mathematically linked to a private key in a unique key pairing. A private key — which appears as a string of alphanumeric characters — is used to digitally sign a transaction to authenticate your transactions on the blockchain. One private key can generate several wallet addresses.
Seed Phrase > Private Key > Public Key > Address
A seed phrase is a group of 12 or 24 words usually generated within the wallet software (Metamask for example is one we recommend) that can be used to derive your private key. Further, your private key can be used to derive your public key — however, it is important to note that your public key cannot be used to recover your private key or seed phrase. Therefore, guard your private keys and seed phrases with your life!
Check out this guide on best practices for storing your seed phrase safely.
Private keys and seed phrases must NEVER be shared with anyone or left susceptible to discovery or theft. Think of a private key like a password or better yet, a PIN number — whoever has it has access to your crypto assets. Unlike traditional money, stolen crypto assets are lost forever. There is no bank to call and report the theft; not even the government can help you recover lost or stolen assets. For this reason, when you create a crypto wallet and receive your private key and/or seed phrase, be sure to store it offline in a secret, safe location only accessible to you. Never store your keys in online unencrypted notebooks, or type them into any website.
Ok now that we have the foundations laid, let's quickly discuss a few different options available for setting up a wallet. There are many options out there but the main categories worth noting are hot wallets, cold wallets, and paper wallets. Paper wallets are really just a way to store the private key and public key pair for your account on a piece of paper. They can be a way to store crypto keys you don’t plan to access for a long time, but are generally deemed obsolete in lieu of seed phrases so we are going to focus on hot and cold storage here.
A hot wallet is a software wallet that has been directly connected to the internet. These can be desktop applications, browser extensions, or even phone apps. (Metamask, Rainbow, and Trust are a few popular examples) Hot wallets can be used on most computers with access to the internet. MetaMask browser extension is a great web option generally accepted on all web3 applications and the one we will focus on below.
A cold wallet is one of the most secure options, hardware wallets are physical devices you can buy that allow you to make transactions without exposing your seed phrase or private keys to the internet. Hardware wallets typically look like a USB or thumb drive which you connect to your computer or laptop when making a transaction, and then remove once finished. (Ledger and Trezor are a few popular examples) Since your private keys are stored on the device itself and not on a computer or online platform, hardware wallets are very hard to exploit. They are more secure and they are also far less convenient for general usage.
We would recommend using both forms. One hot wallet address for day to day use much like the wallet in your pocket or purse. It’s convenient and functional as long as you keep it safe but it is not recommended that you carry your most valuable assets in it. Setting up a cold storage wallet is highly recommended for holding any real value. Think about this like your vault or safety deposit box. You use it much less frequently and it is far more secure than what you use day in and out.
MetaMask is an Ethereum wallet available for both web and mobile, and in our opinion, it’s one of the best crypto wallet options on the market and perfect for anyone interested in buying an NFT.
HOW TO SET UP A METAMASK WALLET ON DESKTOP
Here is how to create a MetaMask desktop wallet via a Chrome extension. You can also use other browsers such as Firefox and Brave. Whatever you choose, it is very important that you only download from the official MetaMask site.
- Go to MetaMask.io
- Click either of the “Download” buttons on the homepage.
- Click “Install MetaMask for Chrome.” You will be automatically taken to the Google Chrome web store.
- Click “Add to Chrome” and add the extension. Once installed, you will be able to view the MetaMask fox head icon in the top right corner of your browser by clicking on the puzzle piece icon.
- Click “Get Started” and choose between importing an existing wallet or setting up a new one. Let’s assume you don’t have an existing wallet and need to create one. Click “Create a Wallet.”
- Once you’ve created your wallet, you will be able to view your seed phrase (the 12 word sequence used to recover and backup your wallet). Remember, this must be hidden and never shared with anyone. Do not take a picture or screenshot of your seed phrase — instead, write it down immediately on a piece of paper and put it in a secret, safe location. Even better, write your seed phrase down on 2-3 pieces of paper and store each paper in a separate secure location (like one in a personal safe and one in a bank safety deposit box). Alternatively, you can download the seed phrase and keep it offline on an encrypted hard drive. Having multiple backups of your seed phrase is good practice just in case one copy is ever lost or destroyed. After documenting your seed phrase, click “Next.”
- Confirm your seed phrase by clicking on the correct words in the correct order of your 12 word sequence and click “Confirm.”
- Click “All Done.”
- Optional – you can leave your new account as “account 1” or choose to rename it.
It’s that easy! You can now access your MetaMask wallet via the fox icon in your browser and begin purchasing and receiving crypto! If you already have Ether in your Coinbase, you can use your brand new Ethereum address (the long number at the top of your wallet page starting with 0x…) to transfer them over into your MetaMask wallet. If you don’t have a Coinbase account, you can buy Ether directly through MetaMask in some U.S. states, however, Coinbase is our favorite way to get Ether into your MetaMask wallet at the moment.
By now, we hope you have a much more comfortable understanding of how cryptocurrency wallets work and the different options available to you. Remember, safety first! Whichever wallet you choose, always protect your private keys and be mindful of the people with whom you transact. If you found value in this article, we would love it if you shared with any of your friends who have been asking about purchasing an NFT or setting up their own cryptocurrency wallet.
Finally we would love to give you a proof of participation NFT to commemorate your engagement with this series! You can either reply to our newsletter or email us at Tampa@WordOnTheStreets.xyz and simply paste your public address in the body of the email and we will send you instructions to redeem your POAP. (Only available to the first 50 that submit addresses)