What exactly is a “Software Wallet”? An Introduction

What exactly is a Software Wallet An Introduction

Introduction of Software Wallet

Cryptocurrencies like Bitcoin and Ethereum are a result of a game-changing innovation known as Blockchain. Blockchain is a distributed ledger that can be used to process financial transactions independently of any single institution. Decentralized finance, often known as DeFi, has been made possible by blockchains. DeFi allows users to conduct monetary transactions without being subject to oversight from governments or conventional financial institutions. Anyone with access to a blockchain, a digital wallet, and some basic computer skills can buy and trade cryptocurrencies with it.

Exactly what is a “digital wallet”?

Investors and holders of digital currency can store and manage their holdings in a digital wallet, which can be a custodial or non-custodial account or space. In the DeFi ecosystem, digital currencies exist as a type of code rather than as a physical good.

As a result, traders and investors require a secure and personally controlled storage medium for their digital currency assets. Like traditional bank accounts, digital wallets allow users to store and access their financial assets electronically. However, digital wallets are typically not regulated by a single government body.

The Significance of Electronic Wallets

Investors in cryptocurrencies would have nowhere to store their holdings if they didn’t have a digital wallet account. Once digital currency are claimed, they can no longer be left on a blockchain.

Crypto tokens are a form of digital currency that can be purchased by investors using either fiat currency or alternative cryptocurrencies. Since all digital currencies are interchangeable, it is incumbent upon their owners to preserve them safely. Cryptocurrency holders need a safe place to store and manage their holdings, and digital wallets provide this need.

Examples of Electronic Wallets

There are a variety of digital currency wallets available, each with their own set of features and use cases. The following are examples of the most common kinds of cryptocurrency wallets:

Physical Wallets

When it comes to digital currency, hardware wallets are the way to go because they allow consumers to keep their bitcoin in a secure USB drive. Hardware wallets are well-known for their capacity to keep digital currency offline, which is a desirable feature for cryptocurrency investors. However, digital currency investors can link their hardware wallets to WiFi if they so choose. Hardware wallets are highly recommended for cryptocurrency investors due to their security and the fact that they can exercise complete control over their holdings even when they are not connected to the internet. The Ledger Nano S, Trezor, and Nano X are three of the most well-known hardware wallets.

Digital wallets

Wallets for digital currency are available in the form of separate software. A user can generate a digital address through many online services, including cryptocurrency exchanges, DEXs, swaps, liquidity pools, and others. In addition, investors can keep their bitcoin holdings on the platforms of several financial services providers including VISA, PayPal, and MasterCard. The same is true for software wallets, with a plethora of options like as Guarda, Exodus, Electrum, and Mycelium.

Burning Billfolds

Internet-connected electronic wallets, or “hot wallets,” are vulnerable to theft. It’s important to remember that when connected to the internet, both software and hardware wallets can act as “hot wallets.” However, due to the ongoing risk of hack assaults, hot wallets are not recommended. Users of hot wallets have access to both a public and private key pair.

Stagnant Financial Relationships

Cryptocurrency wallets that are “cold” are those that are not connected to the internet. These wallets, which are typically hardware wallets, are said to be more secure than others. Due to the fact that a cold wallet is disconnected from the web and other online resources, its contents are safe from theft. Offline wallets, or “cold” wallets, can be unlocked by a variety of methods, including a user’s fingerprint, a password, a PIN, or even their face.

Keychains with a Lock

To store digital currency, a user may use a custodial wallet, in which case the wallet’s private key is managed by a trusted third party. The private keys to the users’ digital wallet accounts are sometimes held in reserve by the cryptocurrency exchanges. For security reasons, investors may be required to change their passwords periodically.

Moreover, it’s a method to fortify the safety of online wallet accounts. In the case of custodial wallets, third-party services are liable for ensuring the safety of the digital currency account by shielding it from any hacker attacks.

Personal Wallets

When it comes to cryptocurrency storage, non-custodial wallets are the way to go because the private and public key are kept safely in the hands of the wallet’s owner. Individual cryptocurrency investors are afforded more freedom with the use of non-custodial wallets. Investors in digital currencies, however, are responsible for safeguarding both their private and public keys. The user is entirely responsible for any loss that may occur as a result of a breach in the security of their non-custodial wallet, whether through theft or hacking.

What Is the Function of a Virtual Wallet?

From what has been discussed, it should be obvious that a digital wallet is essential for any cryptocurrency investor who want to safely store and manage their bitcoin holdings. One variety of digital wallet is the “software wallet.” One way to store and access one’s digital money is through a software wallet, which can be a computer program or a mobile application. Users must first determine which digital wallet will serve their needs best and then download it. Making an account and making the passkeys is the next step.

Typically, software wallets will allow you to create both a private and public key. Owners of software wallets may sometimes receive a seed phrase as well. Owners of software wallets must maintain their private, public, and seed phrases in a secure area and never reveal them to anybody. This is to ensure that their bitcoin accounts remain secure and immune to intrusion from hackers and threat actors.

Users can buy, sell, borrow, lend, stake, and trade digital currencies by linking their wallets to various blockchains, exchanges, and other cryptocurrency platforms.

Essential Elements of a Digital Wallet

It is necessary to understand the fundamentals of a software wallet and its most critical parts. Users who are well-versed in all aspects of a software wallet’s inner workings and functionality will be in a better position to make an informed decision. To help you out, we’ve broken down some of the most important parts:

Secret Code

The definition of a private key is an algorithmically created string of alphanumeric values. The private key is used to ensure the confidentiality of a transaction between two bitcoin wallets. Symmetric private keys can be used for both encrypting and decrypting. When compared to public key encryption, private key encryption is much quicker, and the security level is dependent on the length of the private key. The longer the private key, the longer it took for hackers to figure out how to crack it.

Open Locked

Like a password, a public key serves as an authentication method. Private and public keys are typically used to safeguard a digital wallet. To conduct a cryptocurrency transaction with other parties, you will need to share an asymmetrical code known as a public key.

It’s important to note that while private keys are kept secret, public keys, which provide an address or location for performing the necessary cryptocurrency transaction, can be freely shared by users. Only the authorized and intended recipient can decode the public key used to complete a DeFi transaction using their private key.

Starter Phrase

If a bitcoin trader ever loses their private key, they can use the seed phrase to regain access to their account. To protect their digital wallets, customers must establish a unique seed phrase during account setup.

A seed phrase is used in place of a private key if the user ever loses or has access to neither of their two backup options. The seed phrase functions like a master password for regaining access to an email or online account with a different set of responses.

Commissions on Deals

It’s important to remember that transaction fees are always applicable when utilizing a software wallet. In most cases, there are no fees associated with adding funds to a digital currency wallet. There are fees involved when spending newly acquired cryptocurrency or moving existing cryptocurrency holdings to another address. Before signing up for a software wallet, it is in the user’s best interest to become familiar with the fees associated with making transactions.


Ideally, users of software wallets would be able to connect their wallets to several exchanges, including DEXs and CEXs. It would be great for consumers if a software wallet could interface with as many platforms as possible, eliminating the need for them to switch between different wallets whenever they wanted to check prices or trade cryptocurrencies. By creating a larger number of software wallet exchanges, customers may incur higher transaction costs while buying and selling.

Platform Compatibility

In addition, a software wallet needs to work with a variety of operating systems. Having a software wallet that works on many platforms (like Android and iOS) means that its consumers have more options. The user can continue to use the same account across all of their devices without having to switch between separate software wallets or incurring excessive transaction fees.


Cryptocurrency wallet software should be able to store multiple different cryptocurrencies. A software wallet’s usefulness increases as the number of cryptocurrencies it can store grows. However, the account’s storage capacity should be such that a few hundred tokens are the limit.

Various Software Wallet Options

There are various varieties of software wallets, just as there are many varieties of digital wallets. What follows is a list of some of the most common types:

Using a mobile payment system

A mobile wallet is a digital wallet that can be accessed through a mobile device or a smartphone. One of the simplest and most convenient ways to manage a cryptocurrency portfolio is with a digital currency wallet saved on your device, as most people now use smartphones. Users of mobile software wallets can utilize widgets and smartwatch reminders to maintain tabs on their cryptocurrency holdings.

Wallets for your desktop

Users can find desktop wallets in the form of downloadable software for their personal PCs. Since desktop computers typically have more storage space and faster internet connections, they are a popular choice for keeping cryptocurrency. Professional traders often utilize desktop wallet software to monitor the value of digital currencies in real time.

Users can also take precautions against hackers gaining access to their wallet.dat file by protecting it with a robust password.

Mobile Payments

Users who trade cryptocurrencies but have limited storage on their mobile devices or desktop computers can benefit from using a web wallet. Users can utilize web wallets to safely keep their cryptocurrency holdings online. However, because they are always accessible online, hackers and thieves pose a bigger threat to web wallets. However, with a private key or seed phrase, users can access their web wallet contents from any computer or mobile device.

Currency Notes

The use of paper wallets to store cryptocurrency is currently considered essentially defunct, while there are still few holdouts. A piece of paper and a key generating program are all that’s needed to make a paper wallet. The software generates a pair of QR codes and a pair of encrypted code strings. The paper wallet is an offline non-custodial storage method that is ideal for long-term cryptocurrency preservation and safety.

There is a Full and Bright Node

To make a new purchase, users of full node software wallets must first download the complete blockchain to their device. A light node wallet, on the other hand, is a software wallet that only allows for custodial services and trading without requiring the user to download the entire blockchain.

Affirmed and Nonstandard

Tokens that adhere to specific standards, such as ERC-20, can only be stored in official wallets designed specifically for them. However, there are also “alternative” software wallets that can store and manage a wider variety of cryptocurrencies than the official wallets.

The Difference Between Using Multiple and a Single Coin

There is a special kind of cryptocurrency wallet called a “multi coin wallet” that can store and manage many coins of different digital currency types. A new form of digital currency requires specialized programming in order to be stored in or traded with a software wallet. Contrarily, one-coin software wallets are quite basic, as they can only store a single cryptocurrency.

Sources, Both Open and Closed

The designer of an open-source wallet need not worry about other programmers reading and modifying the wallet’s basic code and programming. In contrast, the source code for closed-source software wallets is guarded by patents and copyright, so programmers require permission to access it.

Indeterministic and Deterministic Models

The seed phrase or other initialization data is used by deterministic wallets to produce a unique passphrase for each user. This means that the private and public keys generated from the one-of-a-kind information for a seed phrase have an additional layer of randomness added to them. If you’re using a non-deterministic wallet, you won’t need the seed phrase or a special initialization vector to generate your passkeys.

The Benefits of a Digital Wallet

Reasons why people opt to use software wallets include:

Readily Available

The software wallets are available to anyone at any time with just a quick internet search. Anyone looking for a good software wallet in their neighborhood can do some research online and check out the feedback from locals. Software wallets in other countries can be accessed with the help of virtual private networks (VPNs) or geolocation services.

Economically viable

When compared to hardware wallets, software wallets are often more cost-effective. The program is available for free on all platforms, and so are new user registrations. As an added perk for signing up for a new digital wallet at exchanges like Binance and Huobi, consumers are often offered a welcome bonus.

Interface for Users

A software wallet has an extremely easy-to-navigate user interface. Users don’t need a deep understanding of computers or programming languages to take advantage of all of its functions. Users may also consult customer service or online tutorials for assistance in gaining access to the software wallet’s premium capabilities.

Restrictions of a Digital Wallet


One major security flaw with software wallets is that they are constantly linked to the internet. There are times when users get their accounts hijacked or when they connect their wallets to spiked links that can take their bitcoin reserves in a matter of seconds.


It might be difficult for users of software wallets to remember their seed phrases, private keys, and public keys. These passkeys can be stolen, and if the threat actors are determined enough, they can be hacked. Password forgetfulness and loss can potentially cause users to permanently lose all of their cryptocurrency holdings.


For cryptocurrency traders, one of the most secure and hassle-free storage options is a digital wallet built within a piece of software. The basic versions can be downloaded for free, while the premium ones can be purchased for a fair amount. In order to continue using their software wallets, users must master the art of keeping their passkeys safe and secret. In 2022, some of the best software wallet service providers include Exodus, Atomic, BitGo, and Jaxx Liberty.

Orizu Augustine
Orizu Augustine is an experienced crypto writer working for Alltechcraft. Having passion for writing, he covers news articles from blockchain to cryptocurrency and iPhone and Samsung related articles.