Digital Wallets

Written by

Zachary R.

Crypto Analyst

Published Dec 14, 2021 at 8:45 PM
Last updated Feb 23, 2024 at 2:58 PM

Digital wallets in TradFi (traditional finance) can refer to various third-party services like Apple Wallet, Paypal, Venmo, or Samsung Pay. Digital wallets in crypto and DeFi (decentralized finance) refers to something a bit more complicated.

You cannot store cryptocurrencies in your bank account. They need to be either custodied by a crypto exchange or located in a non-custodial wallet. 

Custodied wallets have differing layers of risk depending on who is custodying them. If you’re holding your BTC on Coinbase, you’re in a position where Coinbase can choose to withhold your BTC from you if they or the lawmakers governing Coinbase deem that as the right thing to do. 

If you’re holding your BTC in a non-custodial wallet, then you are practicing what’s called self-custody

You can download non-custodial wallets as browser extensions, mobile applications, web applications, and even physical devices connected to your computer via USB.

Non-Custodial Wallets

When you deposit money into your physical wallet, you’re in charge of it - not a bank. 

Non-custodial digital wallets work just the same. Many crypto newcomers are nervous about creating and using these wallets. This is because if you lose your wallet’s password and secret phrase (a mnemonic phrase that helps you restore a forgotten password), then you will lose access to your wallet. You can also send funds to the wrong address, and the funds may be unrecoverable at that point. 

These fears are inversely correlated to the amount of time spent using these wallets. They become second nature to you after a while. Not only are these fears exaggerated at the onset of one’s crypto journey, but they’re offset by the enormous benefits that non-custodial wallets entail. At this point, I prefer to use digital wallets rather than inputting my credit card information onto a payment platform. 

With a non-custodial wallet like Solflare or Metamask, you’re now in complete control of your finances. You have access to different DeFi and NFT platforms that would otherwise be inaccessible with a custodial wallet or traditional bank account. 

What You Can Do With Digital Wallets

Below are some examples of what you can do with a digital wallet.

1. Securely store your cryptocurrency holdings. 
Different blockchains require different types of tokens, thus requiring different types of wallets. Solana wallets must be compatible with SPL tokens; Ethereum wallets must be compatible with ERC20 tokens, etc.

Some wallets work across multiple chains.
2. Send and receive peer-to-peer transactions from one digital wallet to another. 
You can send money for goods and services, or you can fund your favorite crypto casinos account and try to put that money to work!
You can receive your salary in crypto. This could be a stablecoin like DAI or USDC, or a token like Bitcoin or Ethereum whose price fluctuates. 
Not only can you send cryptocurrencies between compatible wallets, but you can store, send, and receive NFTs as well. 
3. Connect to cutting-edge NFT and DeFi platforms.
Most of these platforms only allow non-custodial wallets. DeFi is a new iteration of how finance can work.
On a platform like OpenSea, you can create, mint, and auction off NFTs in return for ETH. These NFTs are stored in digital wallets, and royalties from secondary sales are automatically airdropped (distributed) to NFT creators. Some projects even reward the NFT holders themselves.
Earn a yield on your cryptocurrency holdings by lending them out on platforms like MakerDAO or SushiSwap. 

While some of the processes behind getting involved with digital wallets are complicated to the uninitiated, it’s clear that they are powerful tools. Some wallets even enable you to buy, swap, or stake your crypto to earn some risk-adjusted passive income.

Digital Wallets: Final Thoughts

Cryptocurrencies recently surpassed $2.5 trillion in total market cap, and all of the DeFi ecosystems across different blockchains now secure well over $250 billion. To access this expansive world at its most granular levels, you need a non-custodial wallet. 

Given the massive amount of money in these industries, there has been substantial competition and developments in digital wallets since they became popular alongside Bitcoin over a decade ago. People are quickly waking up to the benefits that self-custody brings to the table.

With over 200 million cryptocurrency users out there and an adoption curve steeper than that of the early internet, there’s definitely going to be a need for secure wallets in the future.