Your Next Wallet Might be Digital

Sometime during the pandemic, I stopped carrying a wallet when leaving the house. Almost all shops supported—often insisted on—touchless payments, so there was no need to carry around paper money, and since my phone was fully able to perform touchless payments, my phone became all I needed to navigate the commercial world. I’m sure most of you have had a similar experience.

The diminishment of the physical wallet in favor of touchless payments on your phone is mildly interesting, but if cryptocurrency fans have their way, we’ll go one step further and adopt specialized wallets for managing all our digital money.

In the real world, a wallet is a thing that holds your money and your proof of identity. A cryptocurrency wallet serves similar purposes—it’s basically a simple database that stores encrypted private keys for one or more blockchain accounts and some code that knows how to use the keys. These private keys identify you on the blockchain and allow you to perform cryptocurrency transactions. If you lose your keys, you lose your crypto, so it’s pretty important to keep these keys safe.

Most wallets run on mobile phones or in browser extensions. The most popular is Metamask, which is available as a phone app or a browser extension. Metamask allows you to send and receive Ethereum and Ethereum-compatible currencies and allows you to identify yourself to Web3-enabled websites without needing a username or password.

Metamask and similar products are relatively easy to use and popular. But they are not particularly secure—just as your physical wallet could be stolen, a Metamask wallet could potentially be hacked, particularly if you lose the phone or computer hosting the wallet. So just as we don’t walk around with our life savings in our physical wallet, we don’t leave all our crypto in a software wallet like Metamask.

Those with significant amounts of money in cryptocurrencies have two choices for secure storage. Custodial solutions such as Coinbase Custody act like banks for crypto. It’s also possible to leave one’s cryptocurrency in a large exchange, secure in the knowledge that the largest exchanges are solid and secure. Except that, as we recently saw with the failure of the FBX exchange, crypto exchanges are not at all reliable. When FTX imploded as a result of shoddy accounting practices, $8 billion of wealth was lost!

The other option for secure storage—and really the only safe option—is to use a hardware wallet. A hardware wallet is usually a USB device that contains private keys and wallet software. When plugged into your computer, the wallet code can perform transactions on your behalf, but because the private keys never leave the hardware device, you can be sure that your private keys cannot be compromised.

However, a hardware wallet can still be lost, so it’s necessary to keep a “recovery phrase” somewhere safe. The recovery phrase is a set of 12-24 words that can be used to recreate a private key.

Of course, if someone gets hold of your recovery phrase, they can steal your crypto, so you need to hide this somewhere or store it in secure bank storage.

Obviously, this is all too much for the average person. Until we have a better solution for wallets, we can’t expect the average citizen to adopt crypto solutions. In the long term, perhaps banks will take on the responsibility of holding individuals’ crypto wealth, and governments will regulate and protect these crypto savings accounts. Until that happens, I suspect cryptocurrency will be unable to enter the mainstream.