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Digital Wallet Types:
Custody wallets:
Wallet used by custodian to hold keys on behalf of clients
Client wallet provides visibility to what is in accounts, the client can request to do trades on their behalf but is no longer in possession of the private key, they rely on the custodian to sign transactions
Non-custodial wallets (self-custody):
No third party, wallet used by digital asset owner to hold their keys
Consumer wallets:
Typically holding modest to moderate values
Single party approval (no multi party approvals)
Basic key security, focus is more on UX and convenience
Cost: free or very low cost
Institutional wallets:
Typically holding high value
Multi party approvals, often require other policy controls
Advanced security, the focus is on security, sustainability and control
Cost: thousands
Hot wallets:
internet connected w limited policy controls
Warm wallets:
internet connected w policy controls
Cold wallets:
isolated from the internet w policy controls
Segregated wallets:
Each client's transaction is recorded on-chain using a unique wallet / address
Institutional wallet assuming unique private key to each client account
This records each clients transactions directly to the blockchain
Provides complete audible trails of where coins are
Omnibus wallets (pooled wallets):
Each client's transaction is recorded on-chain using a common wallet
clients performing activities like trading or buying coins can all be done in a pooled wallet before even hitting the blockchain
All tracking and reporting is done / managed off-chain
Lots of diff clients, but rather than a unique individual wallet for each client account. All client assets are pooled into one wallet that are managed by the exchange
Omnibus wallets are attractive to exchanges bc, diff clients performing diff activities like trading or buying coins, can all be performed in pooled wallet before even hitting the blockchain
This is because individual client delimitation of who owns those coins is managed off-chain by accounts the exchange is managing, these having nothing to do with the blockchain itself.
HD Wallet (hierarchical deterministic):
A master key creates child keys → grandchild keys → allows us to keep creating more and more keys that map back to the master key
All HD wallets are generated from a single master key which creates a xpub (extended pub key) and xpriv (extended private key)
All public and private keys are derived from xpub/xpriv
All public and private keys can be recovered from one seed phrase or master key → this radically simplifies the key backup and recovery
Wallets provide the following primary functions:
- Store Keys
- Keep keys safe
- Accessing keys for transactions
Digital assets = bearer assets meaning you are the one in physical possession like cash
Crypto = the party holding the private key is the owner of the assets.
AKA not your keys not your crypto