NewsWhat Is a Web3 Wallet and How Does It Work?

What Is a Web3 Wallet and How Does It Work?

By

Algorand Foundation

Web3 refers to the latest phase of the internet. It is centered around self-sovereignty and inclusion, allowing you to take ownership of your data and digital assets. Web3 incorporates decentralized blockchain technology, which aims to bring users security and transparency as they navigate the internet. Central to this new iteration of the internet is a Web3 wallet that stores your private keys, which allow you to access and manage your blockchain-based assets, like cryptocurrencies and NFTs, in a private and self-custodial fashion.

In this article, we'll take a deep dive into what is a Web3 wallet, then explore its evolution, key features, types, and security considerations. By the end, you'll have a better understanding of the role Web3 wallets play in the decentralized web.

Understanding Web3 wallets

The evolution of digital wallets

Digital wallets have been around for a long time and have taken on different forms. The first generation of digital wallets, which we can retrospectively call Web1 wallets, were simple and primarily used for storing payment information for online purchases. With the advent of Web2, digital wallets became more sophisticated and enabled users to store and manage a wider range of digital assets, such as loyalty points, gift cards, and even boarding passes. However, these wallets were still centralized, meaning that a single entity was entrusted with user information. 

With the rise of blockchain technology and cryptocurrencies, digital wallets have evolved in their capabilities. In contrast with earlier digital wallets, users can choose to have full control over their digital wallets and assets that allow for secure, peer-to-peer transactions without the need for intermediaries.

What is a Web3 wallet?

At its core, a Web3 wallet is a software program that stores private keys, which are necessary for accessing blockchain networks and conducting transactions. Unlike traditional wallets, which store physical currency, Web3 wallets store digital assets such as Bitcoin, Algorand, and NFTs. 

It’s important to note that all Web3 wallets store private keys but do so in different ways. A self-custodial (or non-custodial) wallet, such as the Pera Wallet, gives you full control over your funds as you possess and control the private keys. Essentially, you are your own bank. The Web3 wallet stores your private keys; the wallet issuer should not be able to see your keys. On the other hand, some Web3 wallets are custodial, meaning that a third party, such as an exchange, manages your private keys on your behalf. The benefit of this is convenience; however, you have to fully trust the custodian with your funds. Web3 wallets are designed to be user-friendly and accessible, allowing anyone to access blockchain networks without needing loads of technical knowledge. 

Key features of Web3 wallets

Web3 wallets come with a range of features that make them valuable tools for interacting with blockchain networks. Some of the key features include:

  • Peer-to-peer: Web3 wallets allow you to send money from one wallet to another through a blockchain network without the need for an intermediary like a bank or payment platform. 
  • Multiple assets: Web3 wallets can be used with a variety of blockchain networks and applications, making it easy to manage multiple digital assets, such as cryptocurrencies and NFTs, from a single interface without needing to switch between different wallets.
  • Security: Web3 wallets use strong encryption to protect private keys from hackers and other third-party threats. 
  • Interoperability: Web3 wallets can interact with other Web3 applications, making it simple for users to interact with decentralized exchanges, marketplaces, and other blockchain-based applications.
  • Privacy: Web3 wallets do not require users to share their personal information with third-party providers, which means you can maintain greater control over your digital assets and personal data.

How Web3 wallets work 

Web3 wallets have become increasingly popular as more people become interested in blockchain and cryptocurrency. These wallets are designed to securely store private keys and interact with blockchain networks.

Creating and managing private keys

One of the most important aspects of Web3 wallets is their ability to securely store private keys. These keys are generated using complex mathematical algorithms and are used to sign transactions on the blockchain network. When a user creates a Web3 wallet, the wallet generates a pair of keys: a public key and a private key. The public key is used to receive transactions, while the private key is used to sign transactions and verify ownership of digital assets. It's crucial that users keep their private keys safe and secure, as anyone with access to the key can access the associated digital assets.

Web3 wallets use advanced encryption techniques to protect private keys. Some wallets also offer additional security features, such as multi-factor authentication and biometric verification, to prevent unauthorized access to the wallet.

Interacting with blockchain networks

Once a Web3 wallet is set up and has generated private keys, you can begin interacting with blockchain networks. This includes sending and receiving digital assets, as well as interacting with smart contracts. To send a transaction, you simply need to enter the recipient's public address and the amount you wish to send. The wallet will then sign the transaction using your private key and broadcast it to the blockchain network for verification.

Web3 wallets can also be used to receive digital assets. When you receive a transaction, it is broadcast to the blockchain network and recorded on the public ledger. Your wallet will then update to reflect the new balance.

Facilitating transactions and smart contracts

In addition to sending and receiving digital assets, Web3 wallets can also interact with smart contracts. Smart contracts are self-executing contracts with the terms of the agreement written into code. Web3 wallets can interact with these contracts by sending and receiving data, triggering contract executions, and verifying ownership of digital assets.

Smart contracts have many potential use cases, including supply chain management, decentralized finance, digital identity verification, and asset tokenization. As more industries begin to explore the potential of blockchain technology, the use of Web3 wallets is likely to become even more widespread.

Read our guide on wallet security and best practices to securely store your digital assets. 

Types of Web3 wallets

Now you have learned about what is a Web3 wallet, let’s take a look at the differences between Web3 wallets. There are several types of Web3 wallets available, each with its own unique features and benefits.

  1. Browser-based wallets
  2. Mobile wallets
  3. Hardware wallets
  4. Desktop wallets

Browser-based wallets

Browser-based wallets are Web3 wallets that are accessible through a web browser. These wallets are convenient to use as they require no installation and can be accessed from anywhere with an internet connection. They are often used for quick and easy transactions, but they may be more susceptible to security vulnerabilities such as phishing attacks.

One advantage of browser-based wallets is that they are easy to set up and use, even for those with little technical expertise. They also often come with features such as two-factor authentication and password protection to enhance security.

Mobile wallets

Mobile wallets are Web3 wallets that are installed on smartphones and tablets. These wallets are ideal for users who want to access their digital assets on the go. They often come with features such as biometric authentication and push notifications for added security.

In addition to convenience, mobile wallets offer a high level of security. They are often encrypted with advanced security features to protect against hacking and other threats. Some mobile wallets also offer the ability to back up private keys and seed phrases, allowing users to recover their assets in the event of a lost or stolen device.

However, it is important to keep in mind that mobile wallets may still be vulnerable to malware and other threats. It is recommended to only download and use mobile wallets from trusted sources and to always keep the device and wallet software up to date.

Hardware wallets

Hardware wallets are physical devices that store private keys offline, making them one of the most secure ways to store digital assets. These wallets often come with features such as PIN codes and backup seeds for added protection. They are ideal for users who want the highest level of security for their digital assets.

Hardware wallets are designed to be tamper-proof, meaning that they cannot be hacked or compromised easily. They are often used for storing large amounts of digital assets or for long-term storage.

However, hardware wallets can be more expensive than other types of Web3 wallets, and they may be less convenient to use. They require a physical connection to a computer or mobile device in order to access and manage assets.

Desktop wallets

Desktop wallets are installed on a computer and provide a secure, private way to store digital assets. These wallets are ideal for users who want to use their computer for transactions and other Web3 activities. They offer a high level of security, as private keys are stored locally on the computer.

Desktop wallets often come with advanced security features such as multi-factor authentication and encryption. They are also often open source, meaning that users can verify the code and ensure that the wallet is secure.

However, desktop wallets may be vulnerable to malware and other threats. It is important to use antivirus software and to only download and use desktop wallets from trusted sources.

Security considerations for Web3 wallets

Protecting your private keys

The most important aspect of Web3 wallet security is protecting your private keys. To ensure the safety of your digital assets, make sure to use a wallet that uses strong encryption to store your private keys, such as a hardware wallet. Additionally, never share your private keys with anyone, and make sure to back them up in a secure location.

Wallet backup and recovery

In the event that you lose your private keys, it's crucial to have a backup plan in place. Most Web3 wallets come with backup phrases or seeds that allow users to restore their wallets and recover lost digital assets. Make sure to write down these phrases and keep them in a secure location.

Identifying and avoiding scams

In blockchain, much like other nascent technologies and industries, there are bad actors that do not act in good faith and look to exploit users. To avoid falling victim to these scams, make sure to use reputable wallets and never enter your private keys or other sensitive information into suspicious websites or applications.

Friction in Web3 wallet adoption 

The friction of Web3 wallet adoption stems from several user experience (UX) issues, hindering wallets from being adopted more widely. Complex seed phrases, typically consisting of 12 to 24 words, serve as a backup for Web3 wallets, allowing users to recover their assets. However, relying on users to securely store and back up these phrases creates a single point of failure and poses a significant usability challenge. 

Moreover, hardware wallets, although highly secure, present a barrier to entry due to their complexity and steep learning curve. To address these issues, solutions such as account abstraction and social recovery have emerged. Account abstraction aims to simplify user wallet interactions by introducing programmable, self-custodial accounts ("smart accounts") that reduce friction in onboarding new users to the Web3 ecosystem. 

Additionally, social recovery methods split and securely store private keys in the user's device, social login provider, and recovery methods. This can enable a non-custodial Web3 wallet with a user-friendly onboarding experience, combining the best of Web2 authentication with the security and privacy of Web3. By addressing UX issues and providing solutions like account abstraction and social recovery, Web3 wallets can become more accessible and foster broader adoption among newcomers to the Web3 space.

The role of Web3 wallets in the decentralized web

As blockchain technology and cryptocurrencies continue to grow in popularity, Web3 wallets will become an increasingly important part of our financial infrastructure. Web3 wallets are an essential access point for anyone looking to participate in Web3 as they are crucial for holding cryptocurrency, NFTs, and other digital assets.  

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