Nowadays, the importance of digital wallets can’t be ignored even if it is a Web2 or Web3 ecosystem. In its simplest terms, a digital wallet allows its custodian to store and manage digital assets right from digital currency to gift cards to digital coupons, etc.

The most significant difference between a Web2 and a Web3 wallet is the underlying nature of the ownership of the wallets. The Web2 wallets are centralized ones, where you have to trust the organisation to keep your data safe and secure. However, Web3 wallets are the gateways to the decentralized web.

What are Web3 wallets? 

Web3 wallets are digital wallets that are used to manage and interact with Web3 applications built on blockchain technology. Web3 wallets, also known as decentralized wallets or blockchain wallets, store digital assets on the blockchain network which includes cryptocurrencies, decentralized applications (dApps), NFTs and other digital assets.

Unlike traditional wallets, which are managed and controlled by intermediary parties like banks, and financial institutions, Web3 wallets allow the users to control their funds, and sensitive data in alignment with the core principles of a decentralized network.

Traditional Wallets vs. Crypto Wallets vs. Web3 Wallets

Traditional Wallets – Traditional wallets are managed and operated by third parties, like banks, financial institutions, and fintech organisations. They allow the users to facilitate the transaction, and maintain the balances on their platform.

Crypto Wallets – Although, Web3 wallets and crypto wallets are used interchangeably but there is a fundamental difference between these two terms. Not all crypto wallets support the decentralized applications (dApps), and decentralized finance (DeFi) platforms.

Web3 Wallets – Web3 wallets do what all the crypto wallets do but in addition to over and above, they also support Dapps and DeFi platforms as well. In a nutshell, Web3 wallets are compatible with a broader variety of digital assets.

Key Features of Web3 Wallets

Peer-to-peer – The Web3 wallets do interact in a peer-to-peer ecosystem which means you don’t have to rely on any third party to facilitate the transaction.

Multiple assets – Web3 wallets allow the users to hold various digital assets, like cryptocurrencies, NFTs, etc.

Security – Since Web3 wallets use private keys to sign and validate the transaction before adding it to the blockchain network they are one of the secured apps due to their strong encryption method.

Smart contract and DeFi interoperability – Web3 wallets can interact with various other Web3 applications seamlessly, allowing users access to dApps, Defi, marketplaces, exchanges and other blockchain-based applications.

Privacy – There is no third party involved in the transaction so the tempering of data is almost negligible. In addition to this, users get a private key as soon as they create their wallet which is nothing but a cryptographic string to sign and validate the transaction on the blockchain network in a secure manner.

Multi-asset and multi-chain support: Web3 wallets not only covers a wide range of blockchain networks (bitcoin, Ethereum, Solana) but also cover a wide spectrum of multi assets like cryptocurrency, NFTs, and other digital assets.

Multi-Currency Support: Web3 wallets are compatible with a wide range of cryptocurrencies and tokens available in the market, allowing users to buy/sell any blockchain digital currency they would like to.

Custodial vs. Non-Custodial vs. Smart Contract Web3 Wallets

Generally, there are three broad categories you can classify Web3 wallets into – 

1. Non-custodial wallets

Non-custodial wallets (self-custody) are the ones where you have complete control over your assets. These wallets are considered the safest option for investors, as the responsibility of keeping the private keys safe lies with the user only.

Non-custodial wallets are typically accessed through web browsers, mobile apps or desktop clients. Some of the common non-custodial wallets are Metamask and TrustWallet. 

2. Custodial wallets

Custodial wallets also perform the same functions as non-custodial wallets do but here the responsibility of managing your private keys lies with the third party, such as exchanges, on your behalf. So, you to have trust the custodian with the funds and ensure that they are using the highest level of encryption security in order to protect against any malicious attack on the wallet.

Custodial wallets ask you to complete your KYC (know-your-customer). The wallet you have in your Binance account or Coinbase account is a classic example of a custodial wallets. 

3. Smart contract wallets

These wallets are managed and operated by a smart contract on the blockchain network. Unlike custodial & non-custodial wallets, these wallets work as the logic/algorithm predefined in the smart contract which would again require multiple signatures. And that’s the reason of their added layer of security makes them more secure and foolproof. 

Smart contract wallets can be used by an individuals, businesses, or organisations that require multiple parties to complete the transaction.

Types of Web3 Wallets 

Browser-based wallets

These wallets are accessible through a web browser (in terms of browser extensions). They are one of the most convenient wallets to use due to their easy set-up nature. Any person with little to no technical expertise can use it to access their digital assets held online. But at the same time, they are highly vulnerable to phishing attacks so we need to be mindful that we’re not interacting with any malicious website or smart contact at all. 

Mobile wallets

As the name suggests, these wallets are the smart applications that are installed on smartphones. The biggest USP of mobile wallets is that they can be used on the go because the user requires a smartphone and internet connection to operate them. Some of the renowned mobile wallets are Trust Wallet and Coinbase Wallet.

Although they are also vulnerable to malware it can be tackled while using two-factor authentication (2FA), biometric authentication and push notification for another layer of security.

Hardware wallets

Hardware wallets are the physical devices that store the private keys offline, allowing the users to add the highest layer of security against any online threat. This is considered one of the safest wallets due to its unique features for keeping private keys offline, and in addition to that users can use pin codes and backup seeds for another protection layer. Some of the most popular leading hardware wallet providers are Ledger Nano and Trezor.

Desktop wallets

Desktop wallets are the wallets that get installed on desktop devices and are the optimal solution for those who want to use desktop machines for their transactions and other Web3 activities. Considering desktop wallets are installed on a user’s computer, these wallets are less prone to malware and online threats with respect to browser-based wallets. Exodus and Atomic Walle are some of the common desktop wallets available in Web3.

Why do we need a Web3 wallet?

There is a lot happening in Web3 space every day. News token launches, new cryptocurrencies, and new NFTs are been added now and then. There was a need for a tool/smart application that enables individuals to participate in decentralized finance (DeFi), non-fungible tokens (NFTs), decentralized autonomous organizations (DAOs), and other emerging blockchain-based applications. 

These wallets act as a bridge between a user and the decentralized web and empower them to manage and store various digital assets on their own without relying on any third-party involvement.

How does Web3 wallet work?

The idea of the Web3 wallet was conceptualised to grant users more access and control over their assets. This means that users are responsible for managing their private keys and seed phrases securely.

Once you sign up for a Web3 wallet, the wallet generates a pair of keys: a public key and a private key. The public key is your public address which is supposed to send/receive transactions, where the private key is used to sign and verify the transaction in the blockchain network. 

Apart from the obvious functionality of sending/receiving digital assets, Web3 wallets can also interact with smart contracts. These smart contracts are nothing but self-executing contracts written in the form of a code. 

Never share your private keys and seed phrases with anyone otherwise there is always a risk of losing your digital assets to hackers.

Which Web3 wallet is the best?

As we used to say, one size doesn’t fit all. The best Web3 wallet depends on your ease with them, the amount of control you demand for your digital assets, and your trust in third parties. 

Non-custodial wallets are ideal for those who want complete control over their assets.

Non-custodial wallets could be a better choice for newcomers to the wallet space who want a trusted third party to manage their assets on their behalf.

Smart contract wallets are ideal for businesses or organizations that require multiple parties to approve transactions.

Ways to keep your wallet secure

Since Web3 wallets hold valuable digital assets they are prone to malicious attacks. We are listing down some of the best practices to keep your wallet safe and secured – 

Keep your private keys safe: This is the first and most important advice to a wallet user. Never share your private keys and seed phrases with anyone, even if they are known to you. You are recommended to store them in a secure location where only you can access them. 

Use two-factor authentication (2FA): 2FA adds an extra layer of security to your wallet. Use it wherever applicable.

Keep your phone and software up to date: Ensure your phone and wallet software is always up to date as new roll-out updates in the software are meant to enhance the security of the wallet.

Use a hardware wallet: If you are in a dilemma about which wallet gives you the highest level of security then opt for hardware wallets. These wallets are physical devices that store your private keys offline and are considered the safest bet of all.

Beware of phishing attacks: Be cautious of any unsolicited email, spoofed domains, or any service that asks for your private keys or any personal information. 

These are some of the highly recommended practices to keep your Web3 wallet safe and intact.

Advantages of Using Web3 Wallets

There are many advantages of using Web3 wallet over any other traditional and centralized wallets out there. Some of them are mentioned below – 

Security: Since Web3 wallets operate in a blockchain ecosystem that is tamper-proof, decentralized, and trustless it offers a high sense of security to the users.

Control Over Assets: Web3 wallets allow the users to manage and store the assets without involving any third party like banks/financial institutions/payment platforms.

Interoperability: Web3 wallets are compatible with multi-chain and multi-asset, allowing the user to seamlessly transfer assets.  

Potential Risks and Challenges

Irrespective of numerous advantages, Web3 wallets has also some delimitations/challenges that users should be known of – 

Security Concerns: Cryptocurrency exchanges are a major target for hackers, with more than $1.7 billion stolen in 2023 and $3.8 billion stolen in 2022. Since Web3 wallets hold valuable digital assets they are always the target of hackers so there would be some security concerns that coexist with these wallets along with their benefits.

Are Web3 wallets safe?

This is a difficult question to answer as there is no straightforward answer to it. Like any other valuable asset that you own you need to take some precautionary steps to ensure it doesn’t get stolen in the same way, there are some best practices recommended to make your wallet safe and intact.

So, yes they are pretty much safe as long as you have marked checked for all the necessary security measures. 

Closing Thoughts

The future of Web3 wallets is exciting in ahead times. It has the potential to change the way people store, manage and participate in the transaction of digital assets.

When it comes to user control, accessibility, or security, there is nothing that can match your requirements more than Web3. As we will be witnessing the growth of the Web3 landscape in the coming time, Web3 wallets will be going to take centre stage in our financial infrastructure.

When it comes to user control, accessibility, or security, there’s a Web3 wallet that matches your needs. With these top Web3 wallets at your disposal, you’ll be well-equipped to navigate the decentralized future and make the most of this transformative technology.

⚠️ Disclaimer:
Crypto Land is an impartial marketing and educational platform, not a financial advice service. Therefore any content provided, hosted, or expressed by Crypto Land does not constitute financial advice or recommendation, and as such Crypto Land will not be liable for any losses incurred during trading or investing.

Manak Ahuja

I’m Manak Ahuja, a business administration graduate with a passion for digital marketing. With experience from my family’s business, I understand how to scale in competitive markets. My entrepreneurial spirit and digital marketing expertise drive me to create growth and innovation. I’m excited to continue my journey and make a significant impact in the field.