An EOA is what a user needs to manage their funds, send transactions, and identify themselves on the Ethereum network. The only thing a user must own to control the EOA is a private key, which serves two purposes:

  • It is how the account address is derived.

  • It is how transactions will be signed.

In practice, interaction between a non-developer user and the blockchain is allowed by a digital wallet. Despite the name, wallets do not store the currency (the balance is always on-chain) but instead are a tool through which users have a “window” to the blockchain (to view their balance and transaction history) and sign transactions with the private key.

The principal distinctions among wallets are:

  • Who controls the private keys.

  • If there is an internet connection.

Next, let’s discuss the categorizations of wallets and the types of wallets based on these characteristics.

Custodial vs. non-custodial wallets

Custodial wallets are wallets where the service provider (usually an exchange or a company) stores the private keys on behalf of the user. The user does not have direct control over the private keys, which means that the user is trusting the service provider to keep their funds safe. Non-custodial wallets are wallets where the user holds the private keys. This means that the user has direct control over the private keys and is responsible for the security of their funds. 

Custodial wallets provide convenience because the third party handles security for the user. On the other hand, non-custodial wallets are generally considered to be more secure because the user is in direct control of the funds and can manage them without having to trust the service provider.

Hot vs. cold wallets

Another categorization of wallets is based on the presence of internet connectivity.

A cold wallet is not connected to the internet. Cold wallets are typically seen as the most secure way to store and manage digital assets because the private keys are stored in an offline environment that is not vulnerable to hacking and other malicious activities.

A hot wallet is connected to the internet. These wallets are more convenient to use because they allow users to send and receive funds with minimal effort. However, hot wallets are also more vulnerable to cyberattacks because they’re always connected to the internet.

Hot wallets are easy to set up and are typically used for everyday transactions (like buying goods or services online), while cold wallets are typically used to store larger amounts of digital assets because they offer a higher level of security. It is recommended to only store small amounts of cryptocurrency in a hot wallet.

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