WhaleVest｜100 Compass｜What is a Web3 wallet?

What is a Web3 wallet?

Web3 Wallet is a digital wallet designed for the world of decentralized finance. They serve as conduits for users to interact with blockchain networks and decentralized applications (DApps), providing a secure way to manage cryptocurrencies, NFTs, and other digital tokens.

Web3 Wallet vs. Cryptocurrency Wallet

Although the two terms are often used synonymously, not all cryptocurrency wallets are compatible with DApps and DeFi platforms. So while both Web3 and cryptocurrency wallets are used to manage cryptocurrencies.

How Web3 wallet works

Most Web3 wallets are designed to provide users with complete control over their digital assets. This means that users are responsible for managing their mnemonic phrases and private keys.

Typically, whenever you create a new Web3 wallet, you generate a unique 12 or 24 word mnemonic phrase. This is what gives you full access to your cryptocurrency wallet and its private keys (used to sign and verify transactions).

Main functions of Web3 wallet

Although certain features may vary from wallet to wallet, most Web3 wallets share a main set of features:

Multi-asset and multi-chain support: Supports various blockchain networks and digital assets, including cryptocurrencies and NFTs.

Smart Contracts and DeFi Interoperability: Promotes smooth interaction with smart contracts, allowing users to deposit and withdraw from DApps, decentralized exchanges, markets, and other blockchain-based applications.

Peer-to-peer trading: allows users to send and receive digital assets without the need for centralized services or intermediaries.

Security: A good Web3 wallet should offer strong security and implement encryption to protect the mnemonic phrase and private keys from potential threats. Some wallets also include notifications and warnings for potentially malicious websites and smart contracts.

Anonymous: Although most blockchain transactions are publicly available, users do not need to share sensitive or personal information to create a Web3 wallet.

Hosted vs. Non-hosted Web3 Wallets

1. Non-custodial wallet

Non-custodial or self-custodial wallets provide users with complete control over their assets. Popular examples include MetaMask or Trust Wallet. Non-custodial Web3 wallets are considered the safest option for most traders and investors, as long as their private keys and mnemonic phrases remain private and secure.

2. Hosted wallet

Escrow wallets involve a third party managing private keys on behalf of the user. The wallet you have in your Binance account is an example of a custodial wallet. While providing convenience, users must entrust their assets to a custodian, so it is important to choose an exchange that is reliable and trustworthy.

Types of Web3 wallets

There are many ways to classify Web3 and cryptocurrency wallets. In this section, we’ll explore some of the most common types: hardware, web, desktop, mobile, paper, and smart contract wallets. But keep in mind that there is overlap between the different categories.

For example, some Web3 wallets like MetaMask can serve as web and mobile wallets, and provide support for hardware wallets such as Trezor and Ledger.

Hardware wallet

Hardware wallets are physical devices that can store cryptocurrency keys offline (cold storage), providing additional security. Although they are more secure from online threats, they can be a bit difficult to use and access compared to other wallets.

But if you plan to hold cryptocurrencies for a long time or have a large amount of cryptocurrencies, a hardware wallet may be a good choice.​

You can set a PIN for extra protection, and most PINs allow you to create a backup recovery phrase in case you lose your wallet. Trezor and Ledger are popular examples of hardware cryptocurrency wallets.

web wallet

Web wallets typically operate through a browser interface and allow users to access and withdraw their cryptocurrency holdings online. Most online wallets today are also available as mobile wallets. Although convenient, users must be careful when connecting their wallets to DeFi platforms and DApps. Interacting with malicious websites or smart contracts may put your assets at risk.

mobile wallet

Mobile wallets work similarly to web wallets, but are made specifically for smartphones. They allow users to conveniently send and receive cryptocurrencies using mobile barcodes, and also enable easy mobile access to DeFi and DApps.

But just like computers, mobile devices are susceptible to malicious apps and malware. If your phone is lost or malfunctions, it is recommended to use password encryption and back up your mnemonic phrase (or private key) to protect your mobile wallet.

MetaMask, Binance Web3 Wallet, and Trust Wallet are well-known examples of mobile cryptocurrency wallets.We will go into details one by one in the next section.

Smart contract wallet

Smart contract wallets are managed by smart contracts on the blockchain. These wallets introduce programmable self-custody accounts and enable advanced features. Unlike traditional wallets, smart contract wallets allow users to define the rules and conditions of transactions, automate financial activities, and enhance security through programmable logic.​

Smart contract wallets often leverage blockchain technology to provide users with decentralized control over their funds and facilitate integration with DeFi applications. Security features such as multi-signature requirements, time locking, and upgradeability are common aspects of smart contract wallets, making them versatile tools for managing and interacting with cryptocurrencies.

desktop wallet

In the early years of Bitcoin and cryptocurrencies, desktop wallets were more common. They are software applications installed on your computer that provide complete control over your cryptocurrency keys. Security depends on the completeness of the user's computer security, and regular backup of wallet data is crucial to prevent loss.

paper wallet

Paper wallets are often considered by many to be a non-recommended and outdated method. They involve physically printing or writing cryptocurrency addresses and private keys on paper. They provide offline storage to protect against online hackers, but require careful handling and secure storage to prevent physical damage or loss.