Welcome to the second chapter of your crypto crash course. In part one, you discovered the basics of blockchain technology, cryptocurrencies, and Web3; but this module is all about wallets. If you’re thinking “how do I get started?”, you’re in the right place. In this article, you will learn the basics of crypto wallets and how they work; starting with private keys.
Every blockchain address has both a public key and a private key and managing them is imperative to store your crypto correctly. The power of your crypto wallet belongs in the hands of whoever owns your private key. And your public key allows other users to find and transact with you. Therefore, understanding each of them and their differences is imperative if you want to know how crypto wallets work.
But firstly, what is a private key exactly?
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Private Keys Explained: What Are They All About?
Every blockchain address is generated along with two related pieces of information – the private key, and the public key. These keys allow you to control the cryptocurrency corresponding to that particular blockchain address and receive crypto from other people. To understand a private key, it’s also important to understand its relationship with its public counterpart.
What Is a Public Key?
A public key is a public receiving address that enables you to receive crypto. Any user on the blockchain can send funds to your address using your public key.
The public key is similar to your bank account number such as IBAN or SWIFT. Anyone can send you money using your bank account number but they cannot control the funds with it. In the same way, a public key does not give others access to the crypto at your blockchain address, it is purely an address that receives assets.
What Is a Private Key?
A private key grants users access to manage the crypto funds at a specific address. While the public key is like your bank account number, the private key is more like a PIN number or password. It gives you access to your blockchain address and your funds. However, whoever has access to it can control and spend the cryptocurrencies at your address. Thus, keeping it away from prying eyes is imperative.
Apart from providing access to your crypto, a private key also has the power to generate almost infinite public keys – these are the blockchain addresses you can share with the public.
How Does a Private Key Work?
The tech behind private and public keys is quite complex, but it’s part of a wider field of cryptography called Public Key Cryptography (PKC). To learn more about the details, check out the full article on Private Vs Public Keys. But essentially this technology uses a mathematical concept called a Trapdoor function. This means it’s easy to compute in one direction but nearly impossible to reverse, and it provides the whole foundations upon which blockchains are built.
What Do Private Keys Look Like?
A blockchain private key is a randomly generated number with hundreds of digits. For simplicity, they are represented as a string of alphanumeric characters. The private and public keys of Bitcoin and Ethereum are generated using an algorithm called the Elliptic Curve Digital Signature Algorithm.
Let us look at how private keys look on different blockchains:
Ethereum: uses a private key made up of 64 hexadecimal characters.
Bitcoin: uses a 256-bit number that can be represented in several ways.
Either way, if you are looking at your private key, remember not to keep a record of it anywhere online. Your private key is the key to your assets, and no one should be looking at it.
Threats To Your Private Keys
Your crypto depends on the safety of your private key. So, how you manage that key is of critical importance to your assets. There are a couple of factors to consider in this respect.
Firstly though, are you actually in control of your private keys in the first place?
When you buy cryptocurrency on a centralized exchange, it keeps custody of the private keys, and therefore, control of your assets. You have no choice but to trust the platform with your funds. Using this method, the exchange itself manages the private keys and simply lets you use one of its wallets.
While most crypto exchanges follow strict guidelines, they don’t offer users full ownership over their assets. There’s a saying in the cryptocurrency world, “Not your keys, Not your coins”. It means that if you do not hold your private keys, the coins are technically not yours.
The better option is using a crypto wallet that allows for self-custody. To explain, non-custodial wallets allow you to control your private keys, thus giving you true ownership of your crypto.
So you already know that self-custody allows you to store your crypto away from a centralized entity’s control. But what other threats do crypto wallets face?
The next biggest threat to your security is hacking via the internet.
To explain, some crypto wallets operate via software on the same device you surf the net with, such as your smartphone or laptop. This is very convenient, but since they store your private keys within their interface, it means a hacker with access to your laptop could potentially find and read your private keys. At this point, there’s nothing you can do to stop them. The private keys of your account grant the owner permission to control any assets at that address.
How To Keep Your Private Keys Secure
To avoid these types of threats, a great option is to use a hardware wallet, such as a Ledger. To explain, a hardware wallet is a physical device that allows you to manage your cryptocurrencies while keeping your private keys offline. Hardware wallets avoid online hacks as they remain disconnected from the internet.
Ledger Devices are particularly strong as they use a Secure Element chip, one of the most secure computer chips in existence. This keeps your crypto safe from, not just online threats, but physical hacks too. Ledger hardware wallets use advanced technology and follow best security practices to keep your funds safe. Two great hardware wallet options include the Ledger Nano X and Ledger Nano S Plus. Buying a Ledger Device is the first step in keeping your private keys safe, something that’s imperative for every crypto user.