Module 2: Wallets, Custody, and Security
Types of Wallets
Chapter 2 of 14 · about 7 minutes
2.1 Too many choices
Mint searched for "crypto wallet" and found browser extensions, mobile apps, desktop apps, small USB-like devices, metal cards, wallets that log in with an email address, and wallets that claim to need no seed phrase at all.
"Which one is the right one?" Mint asked.
"There isn't one right one," said Hash. "There's a right combination for what you're doing. Most experienced users have more than one."
This chapter maps out the main types of wallets, using two simple questions: who holds the keys, and is the key connected to the internet.
2.2 Hot wallets and cold wallets
A hot wallet keeps its private keys on a device that's connected to the internet, like your phone or computer. A cold wallet keeps its keys offline, on a device or medium that never touches the internet.
Think of a hot wallet as the cash in your pocket: convenient for everyday use, but you wouldn't carry your life savings around. A cold wallet is like a safe at home: less convenient, much harder to steal from.
| Hot wallet | Cold wallet | |
|---|---|---|
| Keys stored | On an internet-connected device | Offline |
| Convenience | High, fast to use | Lower, extra steps to sign |
| Exposure to online attacks | Higher | Much lower |
| Good for | Everyday use, small amounts, frequent trading | Long-term holdings, larger amounts |
2.3 Software wallets
Software wallets are hot wallets. They come in a few forms.
Browser extension wallets live in your web browser. They're the most common way people connect to decentralised applications on a computer, because websites can request signatures directly through the extension.
Mobile wallets are apps on your phone. Phones have useful security features, like secure storage and biometric locks, and mobile apps are convenient for payments and on-the-go use.
Desktop wallets are installed programs on a computer, sometimes with advanced features.
The main risk with all software wallets is the device itself. If your computer or phone is infected with malware, or you install a fake wallet app, your keys can be stolen. Chapter 12 covers device hygiene.
2.4 Hardware wallets
A hardware wallet is a small physical device built to do one thing: store private keys and sign transactions, without ever revealing the keys to the computer or phone it's connected to.
When Mint uses a hardware wallet, the computer prepares the transaction and sends it to the device. The device shows the details on its own screen, Mint confirms by pressing a button, and the device returns only the signature. The private key never leaves the device. Even if the computer is infected, the attacker can't extract the key.
Hardware wallets are a form of cold storage and the most common choice for protecting meaningful amounts. They have their own risks, which Chapter 6 covers in detail, including buying from untrusted sellers and approving transactions without reading them.
2.5 Paper wallets
In crypto's early years, people printed private keys or seed phrases on paper and stored them offline. These paper wallets are cold, but awkward and error-prone to use, and they're largely obsolete today. You'll still see the term, and the core idea, keeping your backup offline, lives on in how we store seed phrases (Chapter 4).
2.6 Custodial wallets
As Chapter 1 explained, custodial wallets are those where a company holds the keys. An exchange account is the most common example. Some apps also offer "wallets" that are actually custodial behind the scenes.
A simple test: if the provider can reset your access without your seed phrase, or can freeze your funds, it's probably custodial.
2.7 Newer models: embedded, MPC, and smart account wallets
Traditional self-custody puts one secret, the seed phrase, in the user's hands. That's powerful but unforgiving, and losing seed phrases is one of the biggest causes of lost crypto. Several newer designs try to make self-custody safer and easier.
Embedded wallets are built directly into an app or website. You might sign in with an email address, a social account, or a passkey, and a wallet is created for you in the background. Depending on the design, the keys may be held by you, split between you and the provider, or held by the provider. It's important to check which.
MPC wallets use a technique called multi-party computation to split a private key into several pieces, held in different places, such as your phone, a cloud backup, and the provider's server. No single piece can sign a transaction on its own. This removes the single point of failure of a seed phrase, but you depend on the system and its recovery processes working as promised.
Smart account wallets (also called smart contract wallets or account abstraction wallets) are smart contracts that act as your account. Because they're programmable, they can support features like recovery through trusted contacts, spending limits, requiring several approvals for large transactions, paying gas in tokens other than the native coin, and batching several actions into one. Chapter 13 explores these.
Multisig wallets require several keys to approve a transaction, for example 2 out of 3. They're widely used by organisations and by individuals protecting large amounts, and are also covered in Chapter 13.
| Wallet type | Who holds the keys | Hot or cold | Main strength | Main risk |
|---|---|---|---|---|
| Browser extension | You | Hot | Easy access to applications | Malware, phishing, malicious signatures |
| Mobile app | You | Hot | Convenience, device security features | Fake apps, compromised phone |
| Hardware wallet | You | Cold | Keys never touch the internet | Tampered devices, blind signing |
| Custodial (exchange) | A company | Hot | Easy recovery, simple to use | Company failure, freezes, hacks |
| Embedded or MPC | Depends on design | Hot | Familiar logins, no single seed to lose | Depends on the provider's design and recovery |
| Smart account | You, through code | Either | Recovery, limits, programmable security | Smart contract risk, complexity |
| Multisig | Several key holders | Either | No single point of failure | Coordination, setup mistakes |
2.8 How people combine them
"So which should I use?" Mint asked again.
"Let me tell you what a lot of experienced users do," said Hash. "Then you can adapt it."
A common setup has three layers. A vault: a hardware wallet or multisig for long-term savings, used rarely. A spending wallet: a software wallet with smaller amounts for everyday transactions and trusted applications. And a burner wallet: a separate wallet with very little in it, used for experimenting with new or unknown applications.
If the burner wallet gets drained by a malicious site, the loss is small. If the spending wallet is compromised, the vault is still safe. Chapter 12 returns to this structure.
Node was unconvinced. "That sounds like a lot of work for someone with a small amount."
"For a small amount, one well-protected software wallet is fine," said Hash. "The point isn't complexity. It's matching your security to what you're protecting."
2.9 Choosing a wallet
This series won't recommend specific wallet brands. Here are the questions worth asking about any wallet.
- Who holds the keys: you, the provider, or a combination?
- If you lose your device, how exactly do you recover access?
- Is the wallet widely used and actively maintained, with a public track record?
- Has its code been audited, and is it open source or otherwise independently reviewable?
- Does it support the blockchains and assets you need?
- Does it show clear, readable details of what you're signing?
- Are you downloading it from the official source?
That last question matters more than people think. Fake wallet apps and extensions regularly appear in app stores and search ads, designed to steal seed phrases the moment you enter them.
2.10 Try it yourself
Make a list of every place you currently hold crypto: exchanges, apps, and wallets. For each one, write down whether it's custodial or non-custodial, and whether it's hot or cold. Then ask yourself whether the amount in each place matches its level of security.
If you hold nothing yet, write down which combination of wallets you'd use for $50, $5,000, and $50,000, and why.
Key takeaways from this chapter
- Hot wallets keep keys on internet-connected devices; cold wallets keep keys offline.
- Software wallets include browser extensions, mobile apps, and desktop apps. They're convenient but exposed to device risks.
- Hardware wallets sign transactions without revealing the private key to the connected device.
- Custodial wallets are controlled by a company. If they can reset your access, they likely hold your keys.
- Embedded, MPC, smart account, and multisig wallets reduce reliance on a single seed phrase, each with its own trade-offs.
- Many users combine a vault, a spending wallet, and a burner wallet, matching security to the amount at risk.
- Always download wallets from official sources.