In this lesson you will learn to:
- Explain what a wallet stores.
- Describe the difference between custodial and self-custody arrangements.
- Explain what an address is.
A misleading name
A leather wallet holds money. A crypto "wallet" does not hold anything of value in the same way. The record of value lives on the blockchain, copied on thousands of nodes. What a wallet stores is keys — and the software to use them to create signatures.
A more accurate name might be "key ring" or "signing tool". Keeping that in mind clears up a lot of confusion: if your phone breaks, the record on the blockchain is unaffected; what matters is whether the keys can be recovered.
Addresses
An address is a string derived from a public key, usually by hashing. It is what others use to identify where a transaction should be recorded. Sharing an address is generally safe — like sharing an account number — but because blockchains are public, anyone who knows an address can see its full history. For that reason, wallet software often creates a new address for each transaction.
Software, hardware, paper
Keys can be kept in different forms, described here only as categories:
- Software wallets are apps on a phone or computer. Convenient, but exposed to anything that compromises the device.
- Hardware wallets are small dedicated devices that keep keys inside and only send out signatures. They reduce exposure to malware on the computer they are connected to.
- Paper or metal backups store the recovery information offline (lesson 5.2).
Every form has trade-offs between convenience, cost and risk. We do not recommend specific products or brands.
Custodial and self-custody
Who holds the keys is the most important question.
- In a custodial arrangement, a company holds the keys on the user's behalf. The user logs in with a password and relies on the company, much as with a bank — but without the same protections in every country.
- In self-custody, the user holds the keys. No company can freeze or lose them, but no company can recover them either.
Neither is automatically better. Custodial arrangements depend on the company's honesty, security and solvency; several large custodial platforms failed in 2022, and their users lost access to funds. Self-custody depends on the user's own care. In the EU, companies that hold crypto-assets for customers must now be authorised under the MiCA regulation (lesson 6.2).
The one rule that never changes
Whatever arrangement is used, the private keys and recovery phrase are the master keys. Anyone who has them has full control. No genuine company, support team or teacher will ever ask for them.
Key takeaways
- A wallet stores keys and signs transactions; the record of value is on the blockchain.
- An address is derived from a public key and its history is publicly visible.
- Custodial arrangements rely on a company; self-custody relies on the user.
- Nobody legitimate will ever ask for your private keys or recovery phrase.
Check yourself
If a phone with a wallet app breaks, is the value on the blockchain lost?
No. The record is on the blockchain; what matters is whether the keys can be recovered from a backup.
Why do wallets often use a new address for each transaction?
Because anyone can see an address's full public history; new addresses improve privacy.
What is the main risk of a custodial arrangement?
Dependence on the company's honesty, security and solvency.
Sources
This lesson is for general education about how the technology works. It is not a recommendation to acquire, sell or hold any crypto-asset and is not financial advice.