What is a software wallet?

Summary

• A crypto wallet stores your private and public keys to provide access to your cryptocurrencies.
• Software wallets (“hot wallets”) are apps on devices such as smartphones or PCs that are connected to the internet.
• They are convenient and provide easy access to DApps, but are also vulnerable to hacking. Ideally, you should combine them with a hardware wallet.

What exactly is a software wallet?

A software wallet is an application that you install on your PC or smartphone to interact with the blockchain, send, receive, and manage your cryptocurrencies. It does not store your cryptocurrencies themselves, but the private keys that give you access to them.

Software wallet vs. custodial wallet

A software wallet allows you to manage your private keys yourself, while custodial wallets, such as those provided by crypto exchanges, manage your keys centrally, making you dependent on these providers.

How does a software wallet work?

Software wallets generate key pairs (public and private keys). The public key is like an account number that you can share, while the private key must remain absolutely secret.

When signing a transaction, the software wallet displays the transaction details on your screen. You confirm the transaction with a signature and send it to the network.

Advantages of a software wallet

• Easy to start: Free, easy to install, and usable on smartphones and PCs.
• Web3 compatibility: Access to many DApps and blockchain services.
• User-friendliness: Especially suitable for beginners and everyday use.

Risks of a software wallet

• Online storage of private keys: Vulnerable to hacking, such as spyware.
• Manipulable display: Malware can manipulate transactions.

Software wallet vs. hardware wallet

• Software wallet: Free, stored online (less secure), vulnerable to attacks.
• Hardware wallet: Costs money, stored offline (more secure), resistant to online attacks.

Best solution: Combination of both

To combine security and convenience, you can use your software wallet in combination with a hardware wallet. While the software wallet provides access to DApps, the hardware wallet keeps your keys safe offline.

Most popular software wallets 2023

MetaMask

Supports Ethereum-based networks, ideal for DApps and NFTs. Available as a browser extension and app; can be combined with Ledger.

Phantom

Optimized for the Solana blockchain, allows token swaps, NFT management, and staking.

Keplr

Leading wallet for the Cosmos ecosystem with IBC functionality.

Temple

Specialized in Tezos, enables easy management, staking, and access to DApps.

Conclusion

Software wallets are convenient and user-friendly but vulnerable in terms of security. The best strategy is to combine them with a hardware wallet to enjoy optimal protection and flexibility.