Different types of wallets for blockchains

Here is my attempt to shine some light on the different types of wallets used with blockchains.

local vs hosted

 

Local wallets are stored on your computer and you have full control over your private keys. On a hosted wallet a 3rd party is hosting your wallet and stores the private keys for you.

If you’re using a hosted wallet you lose many advantages of the blockchain technology. A blockchain is a decentralized network, with the advantage that you don’t need to trust anyone. In a hosted environment the 3rd party is a single point of failure. They need to offer their own infrastructure (next to the blockchain) to provide the service. The blockchains have a huge open source community. If you having trouble or need help, there is properly someone who can support you. The 3rd party on the other hand needs to provide their own support. If the community grows the infrastructure need to scale properly and becomes a very valuable target for hackers. If the blockchain splits into two coins (hard fork) the 3rd party has to decide if they provide you with the new coins or not, since they hold the private keys for you. On the other side a 3rd-party platform can be faster than a regular decentralized blockchain. They can also cut fees, when the amounts are sent in between users. If you have some sort of verification they can restore your access if you lost your login.

You should always prefer the local wallets since you’re in full control and is most likely safer (see offline/online wallets). Hosted wallets mainly provide an additional service like exchanges (or nicehash).

local:

• safe and scalable infrastructure
• big community that provides support
• might be slow

hosted:

• can have additional features
  • fast
  • ability to restore lost access
  • no transaction fees
  • non blockchain services
• you need trust in
  • the people (scams)
  • scalable infrastructure
  • software (security and bugs)

online vs offline

 

An offline wallet has never seen the internet or the blockchain. The online wallet has a regular connection with the blockchain.

This is a tradeoff between security and usability. Setting up an offline wallet is not very easy and convenient (depending on your level of paranoia). You create an offline wallet on a computer that, will never be connected to the internet (also should never been connected to the internet in the past). You need to make sure your software for your paper creation is trustworthy and not modified. Also you shouldn't use a printer to print out a paper wallet. But creating an offline wallet and why it is working with no connection is a topic for its own. When it is properly set up it is very secure and almost impossible to hack. It is hard to send coins from your offline wallet to another address, without the private spend key touching the internet in some way (compromising). Depending on the coin it is also hard to view your balance on an offline wallet. Some coins have private view keys, you can create a read only wallet with only compromising the private view key and keep the private spend key offline. Other coins have no privacy and you can just check your balance in an online explorer.

An offline wallet should be used for bigger amounts of coins and an online wallet for daily use.

offline:

• very secure
• hard to setup up
• hard to make transactions and view balance

online:

• easy to setup up
• easy transactions
• often several gui options

online wallets with light vs full nodes

A full-node wallet will create a peer-to-peer node and syncs with the blockchain. So you will download the blockchain and other nodes are able to download the blockchain off you. A light wallet will connect to a full node which has the blockchain and only transfer the necessary data with the node.

Depending on the coin the light wallet is very fast to set up and use. If the coin using some encryption for private keys, the wallet still needs to scan the blockchain for matching transactions. The light node might not be as feature rich as the full node (like smart contracts, mining and tokens). A wallet with a full node also supports the network.

light:

• faster
• less space
• mobile friendly

full:

• supports the network
• might have more features

Conclusion

There are different types of wallets for blockchains and all have different reasons for existing. Depending on what you want to do with your coins you should follow these rules:

• use an offline wallet for long time investments and big amounts
• use an online wallet for daily trade and use (light preferable)
• only use a hosted wallet if you need the additional features (like trading on an exchange)