Web3 aims to make the most of decentralized technologies and the latest wallets can do much more than manage cryptocurrencies.

What is a Web3 wallet?

A crypto wallet is designed to manage cryptocurrency. Unlike a traditional wallet that holds banknotes, a crypto wallet does not store digital assets. Rather, it stores the cryptographic keys that are the only way of accessing your assets. Wallet software uses the keys to scan the blockchain for matching wallet addresses and calculate the current balance of digital assets at each address.

A Web3 wallet is a type of crypto wallet that not only manages cryptographic assets but also connects with decentralized applications (DApps), so that users can access a wide range of new applications, including decentralized exchanges.

The Cardano community has created a number of Web3 wallets, and more are being created all the time. For a list that is continually updated, see the wallets page on the Cardano developers website.

A word about keys

The keys used in crypto wallets are strings of numbers and letters. They come in pairs; a private key and a public key. A private key is a long, randomly generated number that is mathematically related to a public key, which is a shorter, public-facing alphanumeric string. A public key can be quickly generated from a private key, but it is impossible to reverse the process.

A public key is used to deposit digital assets into a wallet. Assets can only be withdrawn from a wallet with the correct private key. Tell the world your public key, but the security of your private key is of utmost importance.

Main features of wallets

Security

All wallets have password security at a minimum. The password you use must be unique, strong, memorable for you, and unguessable by anyone else. You should consider using password manager software. If properly set up, these are highly resistant to hacking.

Hardware wallets can offer additional features, including biometrics, a physical button that must be pushed, and a maximum distance between a phone and a wallet.

When you create a wallet, you will often be given a recovery phrase of up to 24 seemingly random words. All your keys and wallet addresses can be rebuilt from that phrase. It needs to have the utmost security, just as if it were your private key. 

Custodial or non-custodial

Custodial wallets offer convenience because they are typically easier to set up and use than non-custodial wallets. However, with custodial wallets, the private key is held by a third party (the custodian), which means you do not have full control over your funds. Custodial wallets are typically offered by crypto exchanges.

If you forget the credentials you use to access your funds, the custodian will usually be able to help. However, you must trust the custodian, and you will be just another unsecured creditor if it goes bankrupt.

Non-custodial wallets provide greater security but require more effort to set up and manage correctly. If wallet software stops working on your computer or phone, you can use the recovery phrase to set up a new wallet on the same or a different device. 

Being your own custodian means you are responsible for the security of your funds. Never share your private key or wallet recovery phrase with anyone, and make sure to always install software from a reputable, official site.

Hot or cold

Being connected to the internet, a hot wallet offers quick access to crypto exchanges and continual updating of the blockchain status. Note that hot wallets require robust security features because they are more open to attacks.

A cold wallet can be more secure because it is offline until needed. For example, it may look like a USB drive but be protected with security features. It is useful for the long-term storage of assets but is inconvenient if you use the wallet a lot.

If you make a paper copy of your private key, that is called a paper wallet and is definitely cold. It is inconvenient, and you have to be aware that the ink can fade or the paper can be destroyed.

Light or full node

A full node wallet such as Daedalus from Input Output Global (IOG) stores the whole blockchain on a local machine. By running a full node, you contribute to the security of the blockchain, but it needs more resources in terms of memory and processing power, so is not suitable for a phone. Also, it takes a while to start up.

A light wallet such as Yoroi from Emurgo or Lace from IOG does not keep a local copy of the blockchain. This option means a fast start and low resource usage.

Compatibility

You'll also want to ensure your chosen wallet is compatible with the cryptocurrencies you want to use. Some wallets only support specific cryptocurrencies, so make sure your wallet supports the ones you need.

User interface

The user interface of the wallet is also important. You'll want to choose a wallet that is easy to use and navigate and works in a way that you find appealing and intuitive.

For reference, check out the Lace user experience video that aims to make the user's journey as seamless as possible.

Reputation

Consider a wallet from a reputable and trustworthy provider. Look for reviews, ratings, and feedback from other users to get an idea of the wallet's reputation.

Fees

Using some wallets might incur fees, and the underlying blockchain protocol will also charge some fees for every transaction, so you'll want to consider the costs associated with using the wallet.

Features

Consider the features and functionality of the wallet. When a Web3 wallet is connected with DApps, many features become possible, such as:

• Minting/burning tokens

• Swapping tokens

• Staking tokens

• Lending and borrowing tokens

• Buying and selling NFTs from marketplaces

• Gaming.

Check to see if the features you will use are enabled in the wallet you are interested in.

Development and community

Development and community are also important when choosing a wallet. Look for options with an active and supportive community. Regularly updated wallets with new features and improvements will always be relevant.

A hierarchy of wallets

As part of prudent defense-in-depth, some wallet users adopt a hierarchy of wallets:

• A trading wallet used to communicate with exchanges

• A short-term hot wallet

• A cold-storage offline wallet.

A trading wallet is used to exchange between fiat currency (dollars, pounds, etc) and digital assets. It normally holds a minimum amount of crypto for a term measured in minutes or hours. A short-term wallet holds crypto for days or weeks. Digital assets that matter the most are held in long-term cold storage, possibly in a hardware wallet.

Ultimately, it’s important to understand the pros and cons of each type of wallet before making a decision about which one is best for you.

Lace: a Web3 wallet platform from IOG

Announced in June 2022, Lace 1.0 is now available. The release follows a development process that involved research, code reviews, and usability tests via beta programs. Lace is easy to use and secure, having passed external audits performed by FYEO, a cybersecurity firm specializing in comprehensive blockchain security audits.

Lace is a light wallet platform, meaning it doesn’t need to keep a copy of the whole blockchain to synchronize with the ledger. It is a non-custodial hot wallet, currently implemented for Chromium-based browsers. 

More than storing keys, Lace has features that let you manage your digital assets, access NFTs, and easily stake your ada, all from one easy-to-use interface. Lace also supports bundled transactions – a bundle can have multiple assets and many addresses. It is processed as one transaction for one fee.

Add Lace to your browser and enjoy the world of Web3. Additionally, the Lace team would love to hear feedback from its community. You can do so on their Discord channel here.

Nothing in this article is intended to be professional advice, including, without limitation, financial, investment, legal, or tax advice. Input Output Global is not responsible for your use of or reliance on any information in this article.