At this point, you know what a cryptocurrency wallet is and how it’s used.
Let’s take a step further and look at Abra to make sure you get it inside out which will make you a more confident investor.
To expand on the previous lesson, let’s deconstruct the private and public keys.
What are the private keys?
A private key uses cryptography to ensure security while accessing your cryptocurrencies.
Private keys are just like the PIN code that provides access to your bank account.
When you download the Abra app, a unique private key is created in the form of a mnemonic phrase, which is called the recovery phrase.
Abra’s recovery phrase is randomly created using words so that it’s easier for people to interact with, but it actually consists of encrypted numbers and letters that make up the key needed to access assets stored on the blockchain.
Best practice for handling a private key is to write it down on paper and then store the paper in a secure place. Make sure to test the private key before transferring funds into the wallet.
It’s also recommended to never take a photo of a recovery phrase or keep the phrase on any kind of internet-connected device.
What are the public keys?
A cryptocurrency wallet also stores public keys. Public keys use an asymmetric-key encryption cryptography algorithm that converts a message into an unreadable format. A public key is like your bank account number.
Do you need a wallet for each cryptocurrency?
No. In most cases you can use one wallet for trading multiple cryptocurrencies. Many digital wallets support a multi-coin/multi-currency option, so you don’t need a separate crypto wallet to invest in each cryptocurrency.
Control your own funds
Abra includes an important feature that will essentially allow you to have more control over your funds than with traditional money systems.
Each Abra users’ native assets live in user-controlled addresses on the Bitcoin blockchain, enabling transparency, liquidity, and security.
This type of non-custodial wallet fully leverages the power of permissionless blockchain technology, and enables peer-to-peer transactions without the need for an intermediary. In this instance, Abra operates on top of that model, providing a layer of support and functionality without getting in the way of user control and security.
The alternative, which is used as the backbone for most of today’s crypto exchanges, is a custodial arrangement. A recent article on CoinDesk points out that “a few big players — both centralized and custodial in nature — handle the bulk of trading vote for the $381 billion-worth of the world’s crypto assets.”
Custodial exchanges operate a lot like traditional banks, with accounting and risk management structures that prioritize exchange security over user security.
There is also an inherent security risk to this type of custodial model. With large amounts of funds in one location, custodial exchanges are attractive targets for hackers and other bad actors, both inside or outside an exchange.
In early 2014, the Japan-based Mt. Gox, an early and massive exchange (at one point 70% of all bitcoin transactions were happening on Mt.Gox) was hacked. The loss was valued at over $450 million at the time, but maybe more damaging was the harm it did to Bitcoin’s reputation.
And those kinds of risks are not only part of Bitcoin’s coming-of-age-story — they are ongoing. At the beginning of this year, roughly $530 million of cryptocurrencies was stolen from another Japanese exchange, called Coincheck.
To put this in context, under a non-custodial model, a hacker would need to break into each individual user’s wallet to make off with this same amount of money.
Until next time,
Upcoming Lesson: [Lesson 7] Cryptocurrency investing