There are many different ways to categorize crypto wallets. One way is whether or not the wallet is ‘hosted’.
A ‘hosted’ wallet means that the Master Private Key is held by an exchange. This also means that the wallet can only be accessed and used through that particular exchange’s platform. For example wallets on Crypto.com and Coinbase.com are hosted. In order to access those wallets I have to log in through their web or app platforms. I can only trade the types of crypto that those exchanges make available. Also, I can only trade on the networks/blockchains that those exchanges make available.
An ‘unhosted’ or ‘self-hosted’ wallet is one I have created using one of the various software/apps. Some common software/apps are Phantom, Metamask, Brave, Crypto.com Onchain, and Coinbase wallet. The Seed Phrase and Master Private Key are known only to me. I have complete responsibility for keeping them secret and secure. In addition, I am free to transact through any centralized or decentralized exchanges and any networks/blockchains when buying or selling crypto, as long as the wallet provides access to them.
There are several different ways to access crypto wallets, but all wallets are accessed through software. Wallets associated with centralized exchanges (i.e. hosted wallets), like Crypto.com and Coinbase.com, can only be accessed through their platforms. Self-hosted wallets are accessed through any software that is capable of accepting your Seed Phrase. This means that a wallet created using Metamask, as an example, can likely be accessed through other wallet software like Phantom or Crypto.com Onchain. One thing I’ve noticed is there are differences between the various wallet softwares in regard to available networks/blockchains and crypto. I have yet to find a single wallet software that has access to all networks/blockchains and crypto. Wallet software is typically accessed as a web browser extension or as stand-alone apps on a PC, smartphone, or tablet.
Wallets are often categorized as being ‘hot’ or ‘cold’ or as ‘software’ and ‘hardware’ based. ‘Hot’ means connected to the internet through software. ‘Cold’ means not connected to the internet, or air-gapped from the internet, and the Seed Phrase and Private Master Key is kept on hardware. Since all transactions are done on the internet, my wallet must be ‘hot’ and connected through software whenever I want to transact. When I’m not transacting, it’s possible to wipe out my software login and have my Seed Phrase ‘cold’ stored on a piece of paper (aka hardware), or in a more sophisticated electronic device not connected to the internet (aka hardware), as examples.
Interestingly, if I have my Public Addresses for the various networks/blockchains available I can still receive crypto even though my wallet is offline, or ‘cold’. This is because transactions are merely records on a blockchain – there is no ‘physical’ crypto. A wallet holds nothing but addresses and keys. Someone can send crypto to any of my Public Addresses with or without my knowledge. I’m secure, however, because no one can take my crypto without knowledge of either my Seed Phrase or Master Private Key.
Another categorization of wallets is ‘On-Chain’ and ‘Off-Chain’. An On-Chain wallet involves individual transactions directly on a ‘main’ blockchain/network and between addresses on that particular blockchain/network. Off-Chain wallets increase transaction speeds and charge lower fees by lumping many transactions into batches separate and away from the main blockchain/network. Large batches of ‘off-chain’ transactions are then converted into individual transaction on the main blockchain/network. The main blockchain/network is sometimes referred to as Layer 1 whereas the off-chain technology is sometimes referred to as Layer 2. Some Layer 2 technologies are payment channels and sidechains. As an example, Ethereum is a Layer 1 blockchain/network. There are many Layer 2 networks associated with Ethereum, such as Polygon and Base where transaction speeds are higher and transaction fees/costs are much lower. I’m not convinced that all wallets are either ‘On-Chain’ or ‘Off-Chain’ because it appears some wallet softwares make it possible to transact directly on a Layer 1, main blockchain/network and through a Layer 2, secondary network.
I found the concepts of a crypto wallet to be challenging. A crypto wallet isn’t anything like the wallet in my pocket. A crypto wallet holds nothing but keys and addresses – no crypto – just keys and addresses which can be used to find records on a publicly accessible blockchain. It’s only in these records that the proof of crypto ownership, or not, exists. I suppose that a hosted wallet works very similarly to a bank account at a centralized bank. But a self-hosted ‘hot’ or ‘cold’ wallet is something altogether different again. Yes, challenging concepts.
Once again, this isn’t advice but my experience and understanding so far. Do your own research.
Thanks, Jim.