How do cryptocurrency wallets work?

2 min readAug 4, 2022

In a nutshell, a simple cryptocurrency wallet contains pairs of public and private cryptographic keys. The keys can be used to track ownership, receive or spend cryptocurrencies. A public key allows others to make payments to the address derived from it, whereas a private key enables the spending of cryptocurrency from that address.

Crypto wallets can be both digital and physical

Key Generation

A cryptocurrency wallet works by a theoretical or random number being generated and used with a length that depends on the algorithm size of the cryptocurrency’s technology requirements. The number is then converted to a private key using the specific requirements of the cryptocurrency cryptography algorithm requirement. A public key is then generated from the private key using whichever cryptographic algorithm requirements are required. The private key is utilized by the owner to access and send cryptocurrency and is private to the owner, whereas the public key is to be shared with any third party to receive cryptocurrency.

Up to this stage, no computer or electronic device is required and all key pairs can be mathematically derived and written down by hand. The private key and public key pair (known as an address) are not known by the blockchain or anyone else. The blockchain will only record the transaction of the public address when cryptocurrency is sent to it, thus recording in the blockchain ledger the transaction of the public address.

Different Types of Wallets:

Hot wallets: Hot wallets are like normal wallets that we carry for day-to-day transactions, and these wallets are user-friendly. They are wallets through which cryptocurrencies can be transferred quickly. They are available online. When using Paywong, a hot wallet is automatically generated for you in order to send and receive payments in Stablecoins.

Cold wallets: Cold wallets are similar to a vault; they are physical hardware (such as a USB) used to store cryptocurrencies. Cold wallets are digital offline wallets where the transactions are signed offline and then disclosed online. They are not maintained in the cloud on the internet; they are maintained offline in order to maintain a high level of security.

Example of a cold wallet

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