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How Bitcoin Wallets Have Evolved

Aug 31, 2023

General Wallet Use

10 min

Today, crypto wallets are fundamental for users to interact with blockchains, secure their digital assets, and connect to decentralized applications (dApps). While they began as a simple tool for peer-to-peer transactions, wallets have grown to connect users to an emerging digital economy built on decentralized technologies. 

Leather, for example, is a Bitcoin wallet that gives its users access to Bitcoin Web3. Not only does it exemplify the evolution of Bitcoin wallets, it also demonstrates how advanced crypto wallets have become, giving their users the accessibility needed to tap into the digital economies of the future.



An overview of crypto wallets


When most people think of a wallet, they likely think of a billfold wallet where you neatly tuck away cash, a debit or credit card, transaction receipts, and maybe a picture of loved ones. But  as we continue moving towards a cashless society, we increasingly see ourselves using cards or digital forms of payment.

Crypto is just the latest technological innovation that has impacted how we facilitate commerce, demonstrate our loyalty, and interact with emerging technologies.

The first crypto wallet was held by the mysterious Satoshi Nakamoto, the creator of Bitcoin. However, Hal Finney was the first to run a Bitcoin client software wallet where he received a test transaction of 10 BTC from Satoshi. Wallets have come a long way since then. Still, the emergence of new blockchains like Ethereum paved the way for different wallet capabilities where wallets plug into decentralized applications, exchanges, and marketplaces.


Crypto wallets come in different shapes and sizes, like desktop, mobile, hardware, paper, and web versions. Additionally, there are hot and cold wallets, which we'll describe further below. At its core, a crypto wallet is a computer program that allows users to store, send, and receive digital assets like Bitcoin. Each wallet contains a public address and private key:

  • Public address - This is like a bank account number shared publicly to receive asset transfers and is generated from the private key.


  • Private key - This is a password, typically a string of random words, that grants total access to control ownership of all funds.



What types of crypto wallets are there?


Hardware wallets 


A hardware wallet is an external device that securely stores private keys for cryptocurrencies offline. These devices generally resemble USB thumb drives and plug into a computer. The wallets' private keys are generated and stored on the hardware wallet itself and only exposed to internet access when granted.


Authorizing digital signatures requires the hardware wallet and private keys to send funds. The need for a physical wallet helps mitigate remote tampering and prevents unauthorized access, making these solutions more secure wallet options.


Since physical wallets are stored offline without constant internet connectivity, they are also called "cold wallets." 


Software wallets


Users who often transfer crypto or interact with decentralized applications are more likely to secure assets on software wallets, including desktop, mobile, or online wallets. Since these wallets are typically permanently connected to the internet for ease of use, they are called "hot wallets." 

Web3 wallets often fall into this category. They allow users to go beyond basic crypto wallet functions – such as storing and receiving tokens – and offer a world of possibilities for everything from communications (Web3-based chat, for example), access to decentralized finance (DeFi) protocols and more.


Desktop wallet

Common desktop wallets, including Bitcoin Core, Exodus, and Atomic, are installed locally on a computer. 


Mobile wallet

Application wallets like Coinbase Wallet and MetaMask comprise a few mobile wallet varieties and provide users with hand-held accessibility.


Web-based wallet

Web wallets are generally built right into websites and applications, which users can access by simply visiting a URL. As a result, many web wallets are managed by a custodian, meaning that users are often entrusting their private keys to another party.


Extension wallet

Browser extension wallets are software add-ons that integrate with web browsers to enable users to securely store, manage, and transact directly within their browser. They provide a convenient way to access and control digital assets while interacting with decentralized applications and websites.


The growth of Web3 wallets


Over the years, the rise of Web3 applications has changed how users interact with their wallets. Crypto wallets have evolved to provide users with the accessibility and support needed for them to successfully navigate the growing Web3 ecosystem.



Specifically, Web3 wallets enable users to interact with dApps such as decentralized finance (DeFi) platforms, NFT marketplaces, games and more. These wallets have more flexibility and can store various token standards and NFTs. They can execute wallet-enabled smart contracts to trade tokens, trade NFTs and link decentralized domains to their wallet address. Additionally, most Web3 wallets tend to be self-custodied, giving users full control over their private keys instead of relying on a third party to do so.



The more advanced Web3 wallets we’re familiar with today are generally software wallets that allow users to easily connect to dApps. A number of hardware wallet companies like Ledger, however, have also increasingly adapted to give their users the opportunity to engage with Web3 applications and use cases. 



What is a Bitcoin wallet?


A Bitcoin wallet is a crypto wallet secured by and designed to directly interact with the Bitcoin blockchain, supporting basic transactions between Bitcoin addresses. This allows users to store, send and receive BTC and Bitcoin-secured assets, and are some of the most basic functions offered by a Bitcoin wallet like Leather. 

It’s important to note that wallets do not actually store Bitcoin units. The blockchain records balances associated with addresses derived from the keys. Wallets only enable spending those balances.


The evolution of Bitcoin wallets


Bitcoin wallets experienced limited development since the first wallets came to market years ago. But as additional uses for the Bitcoin blockchain have emerged over the last few years, Bitcoin wallets now have many of the functions needed for users to engage with Web3 apps built on Bitcoin. 

Bitcoin wallets have also recently experienced tremendous growth largely due to the exploration of Ordinals, which inspired additional protocols and use cases built on Bitcoin. The community’s enthusiasm quickly fueled the rapid development of new Bitcoin wallet support, which helped users tap into the exciting innovations they were seeing.

Leather, for example, now offers support for the following:


Bitcoin Ordinals, which are digital artifacts created by inscribing arbitrary data onto a satoshi, Bitcoin’s smallest denomination. Leveraging expanded data availability from SegWit and Taproot, these inscriptions are assigned Ordinal numbers and indexed to each satoshi.

BRC-20, a new token standard that allows for the creation of fungible tokens on Bitcoin using Ordinal inscriptions, enabling new assets to be minted on Bitcoin's blockchain.

Bitcoin Stamps, which are digital collectibles similar to NFTs minted on the Bitcoin blockchain. Also known as SRC-20 tokens, the STAMPS protocol enables images and other digital content to be encoded onto Bitcoin's UTXO.

BNS (Bitcoin Name System), a blockchain-registered name that maps a human-readable identifier to off-chain data or resources. This allows for the decentralized naming and discovery of identities, content and services on the Stacks L2.



Custodial wallets vs.

non-custodial wallets


The creation of Bitcoin centered around the ethos of censorship-resistant asset ownership by allowing users to perform transactions without a third-party institution. This was made possible by securing public and private keys, enabling users to send value from one wallet to another on the blockchain. 

However, as crypto adoption grew, centralized exchanges emerged, onboarding new users stewarding crypto ownership and trading. As a result, these exchanges act as a custodian, ultimately owning access to a user's private key, diminishing the ethos of self-custody.

That’s why wallet users are often faced with a dilemma: should they consider a custodial or non-custodial wallet? 

Given that custodial wallets are managed by a third party (often an exchange), users who opt for a custodial wallet don’t need to worry about losing their private keys. However, in placing their trust in a third party, users need to be aware that their funds could be at risk should security breaches occur. 

This exact scenario is why many people opt for non-custodial and self-custodied wallets like Leather. In this case, users alone are fully responsible for their private keys, which gives them complete control over their wallet and the assets within. But this does mean that users are also solely responsible for securing their private keys. Failure to do so could mean that users will lose access to their assets.



Not Your Keys, Not Your Crypto


Choosing the right crypto wallet is crucial in safeguarding your assets. Users should thoroughly research reputable wallets with solid track records and select options that meet their comfort level. Self-educating through online tutorials or seeking guidance from experienced peers can instill confidence and mitigate potential missteps. 


But most of all, it's essential to ensure users’ private keys are securely stored, easily recoverable and never shared with anyone. Exercising caution when connecting wallets to lesser-known applications will improve security. Adopting a hybrid strategy, like securing long-term assets in cold wallets and frequently transacted assets in hot wallets, can also offer a balanced approach to maintaining accessibility and safety.



Crypto Wallet Recap


Over the past 14 years, crypto wallets have transitioned from basic wallets to dynamic wallets that act as vaults for digital assets, galleries, and serve as a digital passport into the world of Web3. While Bitcoin wallets were once static in their development, recent innovations have introduced new and exciting features. 

But the mantra remains: Not your keys, not your crypto. This emphasizes the importance of understanding the nuances between custodial and non-custodial wallets. Selecting the right wallet is crucial in successfully navigating today's rapidly developing crypto environment, especially in rapidly-evolving ecosystems.

For more on how Leather can help users navigate Bitcoin Web3, visit our features comparison page to determine which Leather wallet app is right for you.