What are Bitcoin Wallets?
As Bitcoin Web3 and the cryptocurrency space evolves, Bitcoin wallets like Leather have become more essential to the user experience than ever. They are, effectively, a user’s gateway into the world of decentralized finance and applications. Whether you’re looking to buy your first sats, show off your Bitcoin NFTs, interact with Web3 apps or more – you’ll need a Bitcoin wallet to make that happen.
But that begs the question: what, exactly, is a Bitcoin wallet?
As Bitcoin wallets take on a greater role in the growth of Web3 on Bitcoin, it’s important to understand what they are, how they work, and the impact they have on the Bitcoin ecosystem. In many ways, Bitcoin wallets are similar to wallets that cater to a variety of cryptocurrencies, but with a few caveats.
The First Crypto Wallet: Born From Bitcoin
The first crypto wallet ever came about as a result from Satoshi Nakamoto’s creation of Bitcoin. In 2009, Bitcoin’s pseudonymous creator, Satoshi Nakamoto, released the first Bitcoin wallet (and crypto wallet, for that matter) as open-source software.
Known as Bitcoin-Qt – and later Bitcoin Core – it gave early Bitcoin users the ability to send and receive BTC. Satoshi Nakamoto conducted the world’s first crypto transaction with Bitcoin-Qt when he sent 10 bitcoins to developer Hal Finney.
Bitcoin-Qt provided a blueprint for future crypto wallets and demonstrated the transactions that could happen between users on single-asset software wallets. To this day, users can still down the Bitcoin Core wallet on bitcoin.com and explore what was the world’s first cryptocurrency wallet.
Defining Bitcoin Wallets
On a basic level, a Bitcoin wallet is used to store, receive, send and receive bitcoin-secured (BTC-secured) digital assets. They give users a way to securely interact with the bitcoin blockchain by containing the public and private key pairs required to transact on the Bitcoin network.
While Bitcoin wallets work in the same way that other crypto wallets do, they primarily focus on empowering users to interact with the Bitcoin network. In recent years, they have become especially important in giving users access to decentralized applications (dApps) built on the Bitcoin blockchain. This includes everything from Bitcoin NFT marketplaces to Bitcoin DeFi protocols, meaning that a user’s Bitcoin wallet is, effectively, their passport into engaging with Bitcoin Web3.
Leather, for example, gives users the ability to conduct basic transactions with their BTC-secured tokens and collectibles while also enabling them to connect to dApps on Bitcoin. These apps range from NFT marketplaces like MagicEden to DeFi platforms like ALEX and Velar.
In short, while cryptocurrency wallets more generally provide a one-stop shop for handling multiple digital assets, Bitcoin wallets are tailor-made for BTC.
How Do Bitcoin Wallets Work?
A cryptographic key pair – a public and private key – are at the core of Bitcoin wallets. These keys are stored by Bitcoin wallets (although the user is generally responsible for securing their own private key) and they enable users to send, receive and interact with the Bitcoin blockchain in a secure way.
A public key is a long string of letters and numbers that serves as a publicly shareable address for Bitcoin-based transactions. The public key is usually derived from the private key, which is a secret passphrase, number or series of words that allow users to unlock and access their wallet.
Private keys prove that a user does have ownership of the funds and assets needed to authorize transactions. They should never be shared, as they serve as a major layer of security for users’ Bitcoin wallets.
When wallet programs generate a new Bitcoin address, they are creating a unique public and private key pair. The private key remains securely stored in the wallet while the derived public key becomes a shareable deposit address, of sorts. To transact with BTC and BTC-secured assets, a Bitcoin wallet uses the private key to sign the transaction. This cryptographic signature proves to the Bitcoin network that a user owns the assets in question and authorizes its move to a recipient.
Types of Bitcoin Wallets: Custodial vs. Non-Custodial
In our previous section, we mentioned that a user is normally responsible for their private keys. Leather users, for example, retain full control over their private keys meaning that everything from storing to securing their 24-word secret phrase is their responsibility.
But that isn’t always the case. Leather is an example of a non-custodial, self-custodied wallet. These wallets put users fully in control of their own private keys in a nod to Bitcoin’s ethos of self-sovereignty.
With a custodial wallet, on the other hand, a third party manages the private keys on your behalf. This is common practice on many exchanges and gives users some advantages, like easy onboarding and account recovery should they lose access.
However, this also means that users are trusting the third party to securely hold their funds and authorize transactions. The popular crypto expression, “not your keys, not your coins,” alludes directly to this practice of entrusting one’s assets to a third party and the risks associated with it.
This choice between convenience and autonomy ultimately comes down to a user’s priorities. But understanding the control distinction is key to picking the right Bitcoin wallet type for your needs.
Types of Bitcoin Wallets: Extension Wallets, Hardware Wallets, and More
Bitcoin wallets come in diverse forms to suit different needs. Generally, wallet providers will give users access on a few different platforms.
Software wallets are applications downloaded to your phone or desktop (Leather’s desktop application is a good example). They offer convenient everyday usage and access to your funds.
Web-based wallets are typically integrated directly into websites and applications, accessible to users through a simple visit to a URL. Consequently, numerous online wallets operate under custodial management, implying that users frequently delegate the responsibility of safeguarding their private keys to a third party. A good example of this is something like the main web wallet users get when they sign up for Coinbase.
Extension wallets are wallets that are downloaded and installed via a web browser. They differ from web-based wallets not only in how they are set up, but also in how much control a user has over their keys. Generally, extension wallets (like Leather) are self-custodial.
Mobile wallets have also grown in popularity over the years as more wallet programs opt for mobile apps. They generally give users the same amount of access to funds and activities that extension wallets have, just on a portable mobile device as they're on the go.
Hardware wallets are physical devices for ultra secure key storage. A user’s private keys, in this case, are kept offline on the device and never directly touch internet-connected systems. Ledger and Trezor are two popular options for hardware wallet users.
Paper wallets involve users printing out their private and public keys to create an offline paper backup. However, this has generally not been a convenient wallet type, therefore paper wallets are in the minority in terms of wallet types.
Web-based wallets, extension wallets and certain software wallets also fall into the hot wallet category, which means that they are connected to the internet. Hardware and paper wallets fall into the cold wallet category as they are offline.
The wide selection of wallet types means that most Bitcoin users can find an ideal solution that fits their priorities around security, convenience and functionality. Advancements in wallet technology have also enhanced the Bitcoin wallet user experience over the years, leading to wallets’ crucial role in the growth of Web3.
The Growth of Bitcoin Web3 and Bitcoin Wallets
The evolution of the Web3 landscape over time has challenged crypto wallets to connect their users to the plethora of decentralized applications and use cases emerging on blockchains. The same can be said for Bitcoin wallets as the Bitcoin Web3 universe expands.
Bitcoin wallets in Web3 now provide more than just payment functionality. Modern Bitcoin wallets are evolving into versatile platforms for all Web3-related activity. This includes tapping into DeFi applications, managing and trading non-fungible tokens (NFTs), connecting to dApps and more.
Not only that, but as the Bitcoin ecosystem expands, Bitcoin wallets also need to evolve so that their users can engage with the latest developments on the blockchain. This includes everything from engaging with Bitcoin L2s to new token standards (like BRC-20) and protocols (like Ordinals).
As Web3 reshapes industries and the internet itself, Bitcoin stands at the heart of this movement, providing a highly secure and decentralized blockchain network. But in order to unleash Bitcoin’s full transformative potential, intuitive and fully-featured wallets are critical. Bitcoin wallets are the tools empowering users to build the Web3 vision on top of Bitcoin’s solid foundations, and they will continue to play a key role in pioneering Bitcoin Web3.
Bitcoin Wallets and the Ecosystem
Selecting the right Bitcoin wallet has become more important than ever for security and utility in today’s ecosystem. Users should understand the core differences between wallet types based on their priorities and consider the experience that each can provide.
That’s because wallets like Leather will continue to play a pivotal role in the progression towards a global economy built on Bitcoin. To leverage the bright future that is to come for Bitcoin, users need to find the optimal Bitcoin wallet that will give them the ownership, security and functionality needed to tap into Bitcoin’s true potential.
Connect to Web3 applications built on Bitcoin with the Leather extension wallet app. Download Leather – the Bitcoin wallet for the rest of us – today.