There's no online economy without digital addresses. Whether you want to read an article on your favorite website, buy stuff on a marketplace, or send goods or money online, you need unique digital coordinates.
Addresses in their many variations, including domain names, URLs, social media handles, or bank account numbers, form the backbone of online interactions.
This includes the crypto industry, with web3 domains (Ethereum Name Service and other naming systems), non-fungible tokens (NFTs), smart contracts, and, obviously, wallet addresses – the essential piece of the crypto puzzle.
What is a crypto wallet?
Whether you're a trader or a HODLer, you need a "place" to access and manage your digital assets. This "place" is called a crypto wallet.
In simple terms, you can think of it as a digital piggy bank for cryptocurrencies such as Bitcoin, Ethereum, Dogecoin, etc. In reality, though, cryptocurrency wallets don't physically or even electronically hold your coins. Instead, they manage access to your digital assets on the blockchain (a global ledger keeping a record of all crypto transactions), where your coins exist.
Wallets are a form of key holders, storing passwords that unlock access to your coins. When you send or receive crypto, your wallet signs a digital note, and based on that, the blockchain verifies and updates its ledger.
What is a crypto wallet address, and how is it created?
Unlike a leather billfold for keeping your Franklins neat and tidy, a cryptocurrency wallet cannot work without an address. A unique identifier is necessary to send and receive payments in the crypto ecosystem. You can compare it to an email address, phone number, or – even more adequately – bank account number.
A crypto wallet address appears as a randomly generated string of letters and numbers. In fact, it's created through a process called hashing.
Let's take Bitcoin as an example. When you create a BTC wallet, it generates a pair of keys: a public key and a private key. The Bitcoin wallet address is created by hashing the wallet’s public key using a specific algorithm (usually SHA-256).
Hashing functions take algorithmically created public keys as input and generate a unique output called a hash. Imagine putting your public key through a blender and spitting out a completely different and unrecognizable code. Hashing converts the public key into a shorter, seemingly random string – the actual Bitcoin wallet address.
While public keys are identifiers, private keys have a different function. They are much like a password to your bank account, allowing you to spend bitcoins associated with your address. For obvious reasons, you should keep your private key secret and never share it with anyone. On the other hand, the public key can be shared publicly without compromising your private key.
The whole process of key creation and hashing happens behind the scenes when you set up a crypto wallet, requiring little engagement from you. The system generates a unique digital ID that becomes your crypto wallet address associated with your coins that you can use for trading, sending, and receiving crypto assets.
Are crypto wallet addresses different for different cryptocurrencies?
Crypto wallet addresses are not universal. Each blockchain runs on its own set of protocols and standards. As a result, different cryptocurrency networks use different address formats and validation methods.
However, things are far from simple. Let's look at two basic examples. According to many resources, Bitcoin wallet addresses are up to 35 characters long. In fact, in newer types, Bitcoin addresses can be 34–62 characters long.
They are composed of alphanumeric characters, excluding "0", "o," "l," and "I," to avoid confusion, since in some fonts, these characters "couples" may look identical. BTC mainnet addresses always start with "1", "3," or "bc1". There are also other Bitcoin address prefixes, such as "m" or "n," "2" or "tb1," but they're reserved for the testing environments (testnet).
An Ethereum wallet address follows a more uniform format. It consists of 42 characters derived from the last 20 bytes of a Keccak hash of an ECDSA (Elliptic Curve Digital Signature Algorithm) public key.
ETH addresses are based on the hexadecimal (base 16) system, which uses numerals 0–9 and letters A–F. They are case-insensitive, meaning uppercase and lowercase letters are treated the same.
Each 42-character string starts with the 0x prefix and uniquely identifies an Ethereum wallet or an account on the Ethereum blockchain. Ethereum addresses are compatible across various networks based on the Ethereum Virtual Machine (EVM). Networks like Polygon, Binance Smart Chain (BSC), Fantom, and Avalanche share the same address format.
It doesn't end with this. Many cryptocurrencies use different address formats. For example, Bitcoin Cash addresses can follow either the legacy format (starting with a 1) or more commonly, the Cash Address (Cash Addr) format, based on bech32 and starting with 'q' or 'bitcoincash:q'.
Other blockchains have their own unique address patterns. Litecoin uses addresses starting with L or M. Ripple (XRP), being a different blockchain network, has a different format altogether. Cardano (ADA), Polkadot (DOT), and many others also have their specific address structures.
How does a crypto wallet address work? Using a public address in practice
There are two basic use cases for crypto wallet addresses: receiving and sending cryptocurrencies. Both are as easy as can be and allow transferring assets much quicker than traditional methods for fiat currencies. Here's what they look like.
Receiving crypto
Your wallet address is typically displayed as a long string of alphanumeric characters. You can find it within your wallet app or on the platform where you set up your wallet. When you want to receive crypto (whether it's Bitcoin, Ethereum https://coinpaper.com/783/vitalik-buterin-expects-ethereum-to-reach-a-new-milestone-for-rollup-scaling-in-2023 , or any other coin), you simply share your wallet address with the sender.
You can do it in several ways:
- copy-paste: copy your wallet address from your wallet app and paste it into email, chat, or any other communication channel where you're interacting with the sender,
- QR code: most wallet apps allow you to generate a QR code for your wallet address, so the sender can scan the code using their wallet app, minimizing the risk of error,
- messaging platforms: using messaging platforms (WhatsApp or Telegram, etc.), you can send your wallet address as a text message or QR code if such a method is supported,
- manual entry: the least convenient option, applicable if the sender is with you in person and can manually type your wallet address (be cautious to avoid typos, as an incorrect address can lead to lost funds).
Sending crypto
Using a wallet address for send transactions is the opposite of receiving crypto. You can:
- type the recipient's wallet address to send them funds,
- copy their cryptocurrency wallet address from the message, website, or any other source provided by the recipient and paste it to your wallet app,
- scan a QR code provided by the person who wants to receive cryptocurrency with your wallet app to automatically input their address.
Security comes first: cryptocurrency transactions good practices
Knowing what crypto wallet addresses are is one thing. Being able to handle them securely is even more important. Here are some vital good practices to keep in mind.
Never, ever share your private keys
This is the rule number one. Your private keys (you can have multiple private keys if you have many wallets) grant complete control over your funds associated with the corresponding address. Sharing them with anyone, even seemingly trustworthy individuals or platforms, is extremely risky and can lead to the complete loss of your cryptocurrency. Don't ever do that!
Double-check, triple-check
Meticulously verify the recipient's crypto address before you hit "send." A single typo can result in your crypto being sent to a wrong address or unrecoverable location. Use copy-paste or – even better – QR codes to minimize the risk of error in a crypto payment.
Test-send before sending
If you're transferring crypto to a new crypto address, consider sending a small test amount first to ensure the wallet address works correctly and is the right destination for your assets. Only then proceed to actual crypto transfers, especially if you intend to transfer larger amounts.
Use multiple addresses
Using different wallet addresses for various transactions is crypto hygiene 101. It enhances your privacy and anonymity, making it harder to track your ownership within the blockchain.
Rotating addresses obfuscates your transaction history and reduces linkability of your Bitcoin transactions.
It also bolsters your defense against attacks, including dust attacks, which involve sending tiny amounts of cryptocurrency to an address to accumulate and reveal information about your wallet, exposing you to phishing attacks.
Label addresses
If you use multiple addresses (for different purposes or coins), as you should, label them within your wallet for easy identification. Such an approach helps you differentiate between several addresses within a single wallet or across different cryptocurrency wallets and avoid slips like accidentally sending funds from the wrong address.
Back up your addresses
Make backups of your wallet addresses and private keys by securing your seed phrases. A seed phrase is a list of words (usually 12 or 24) that represent your private keys and are used to derive your private keys.
Write down the seed phrase and store it securely offline or in a separate, secure location. If you lose your wallet, you can import the seed phrase into a new wallet to regain access and avoid losing your crypto.
Custodial wallet vs non-custodial wallet and cold wallet vs hot wallet. Which one to choose?
Before you start engaging in cryptocurrency transactions, you need to decide on a wallet. You can choose between custodial and non-custodial ones, and from the latter category, you can pick between software wallets (aka hot wallets) and hardware wallets (hardware devices with the primary function of a blockchain wallet).
A less popular option is a so-called paper wallet, which involves printing out your private keys and public addresses on paper. Such wallets are offline and more secure than digital wallets but have fundamental limitations regarding crypto asset management. They are also susceptible to physical damage.
Custodial vs non-custodial wallets – pros and cons
Custodial crypto wallets are wallet services offered by centralized businesses, typically cryptocurrency exchanges. In a custodial wallet, the service provider owns the private key associated with your wallet. In other words, crypto users entrust their private keys to the institution, effectively outsourcing control over their crypto assets.
There are several benefits of this approach, including convenience (user-friendly interface), less user responsibility regarding keys management, and seamless integration with exchange platforms (easier trading and transfers). However, you have to consider a security trade-off since you need to rely on the service provider's security practices. There is also the risk of asset loss if the service provider faces hacking or insolvency.
Non-custodial wallets are decentralized wallets with users being sole owners of their private keys. They are considered more secure because they eliminate the risk of exchange hacks or mismanagement.
Non-custodial crypto wallets give you complete control over your assets without the need to share personal information with a third party. Moreover, many non-custodial crypto wallets support decentralized apps (dapps) and DeFi (decentralized finance) services.
Hot wallets vs cold wallets – pros and cons
If you decide to manage your crypto from non-custodial wallets, you need to choose between hardware wallets, such as Ledger, Trezor, and Coldcard, and software wallets, such as MetaMask, Exodus, and Trust Wallet (a mobile wallet with a browser extension).
Hot wallets are designed for quick and easy access to funds and are perfect for active participants of the crypto market. They are installed on a desktop or mobile device and stay connected to the internet, making them accessible from anywhere. A hot wallet is ideal for trading and regular transactions but may be vulnerable to hacking due to online connection.
On the other hand, hardware wallets are most suitable for long-term cold storage. As an offline device, a hardware wallet keeps your data secure and fully immune to hacking attempts. Hardware crypto wallets are recommended for hodlers who leave their assets untouched over an extended period. They are not accessible online but require precautions against damage or loss.
Crypto wallet addresses – key takeaways
Wrapping it up, you don't need a computer science degree to handle a blockchain address. It's fairly easy with the right wallet and good security practices. Remember that a public wallet address is the one you disclose to receive funds. On the other hand, you should keep your private key secret no matter what: you use it to validate transactions when you transfer Bitcoin or other cryptocurrency.
