With cryptocurrency on the brink of changing how we do value management and exchange value, it is safe to say that decentralized and easy to use wallets are essential. However, there are various types of wallets and among these, one of the most potent ones as far as managing digital assets is concerned, is onchain wallets. For those just getting started with crypto, and great cryptos out now those already interested in DeFi, grasping onchain wallets is important.
What Is an Onchain Wallet?
An onchain wallet refers to a type of wallet that is connected directly to a blockchain, at its core. Onchain wallets are different from traditional custodial wallets as they don’t utilize a third party service that handles your storing and managing the keys for you. As such, you have the private keys to your wallet and your funds as secure as your ability secure your private keys!
In other words, if I own crypto in an onchain wallet, I own the mnemonic from that wallet, and therefore am not relying on the exchange or some middleman to access or control funds. Other distinguishing features include: your digital assets are on record, public, and consisting of information backed up by history; everything you do with your digital assets—sending, receiving or interacting with decentralized applications (dApps)—is recorded and available on the blockchain.
How Do Onchain Wallets Work?
So first understanding how onchain wallets work in their most basic form helps to understand what a non custodial wallet is.
Public and Private Keys
When you set up an onchain wallet, you are given public key and private key. The whole transaction would be impossible without making use of these keys.
- Public Key: Think of this as your wallet’s address on the blockchain. My public key is anyone can send me Cryptocurrency, however, it can only be accessed by me.
- The Private Key: is like the password to your wallet. So it is important to keep this key securely. In case someone gets access to your private key, they get the permission to use your assets.
Blockchain Transactions
After setting up your wallet, you can start sending or receiving transactions. Once you send a transaction, the transaction goes to the blockchain network, the signal is picked up by a miner (in PoW systems) or a validator (in PoS systems) to verify the transaction. After confirmation, your transaction is added to the blockchain, and hence becomes irreversible and transparent to anyone who has the access to the blockchain.
The fact that onchain wallets can interact with smart contracts is a key feature of onchain wallets. Specifically, smart contracts are self executing contracts where the terms of the agreement between the two entities are directly written into lines of code. All of these contracts could allow users to perform features like decentralized finance (DeFi), NFT mint, or crosschain swap in a permissionless and decentralized way.
Key Features of Onchain Wallets
Now let’s see what are the key onchain wallet features that bring much difference from blockchain wallets.
1. Security
Since blockchains are decentralized, onchain wallets are secure by nature. Centralized exchanges store your funds for you, control your assets, and can be hacked, whereas you are in full control of your assets and private keys. In addition, many onchain wallets support multi signature (or multi s) wallets which require more than one signature for a transaction to be approved, an additional layer of security.
2. Backup and Recovery
An onchain wallet is one of the most important aspects and what makes it even more important is one of the most important features which is the recovery of your wallet if device is lost or damaged. When setting up, you get a seed phrase – a series of words that allow you to recover your private key. This phrase is critical to keeping safe and not to be shared with anyone, as it provides access to your funds.
3. Multi-Chain Support
In most onchain wallets, multiple blockchains are supported and they tend to support only one type of cryptocurrency in each wallet. This is especially helpful for trading assets on Ethereum, Binance Smart Chain, Solana, and other blockchains that are common.
4. Integration with dApps
dApps are able to have a perfect and seamless interaction with the onchain wallet. As a result, the world of possibilities turns to trading in decentralized exchanges (DEXs), interacting with the DeFi platforms, take loans, stake and yield farm.
Onchain Wallets vs. Custodial Wallets
There aren’t many differences when comparing wallets onchain vs. traditional custodial wallets, except that the onchain wallet takes away control and responsibility.
- They are Onchain wallets: they own the keys, and therefore they have full ownership of their assets. If you get rid of your private secret or seed expression, your funds are lost.
- Custodial Wallets: A third party such as an exchange (e.g. Coinbase or Binance) controls these wallets, and holds all of your private keys. You should generally avoid custodial wallets which are user friendly but make you exposed to risk as if the exchange is hacked or crashes, it may expose your funds to risk.
Onchain wallets are many users’ choice as they allow full control over assets and do not depend on third parties for security.
Popular Onchain Wallets
Several onchain wallets have gained popularity because they are secure, funtional and ease to use. Now a few examples:
1. MetaMask
This wallet is one of the most popular onchain wallets out there especially when it comes to users in the Ethereum ecosystem. It lets you save Ether (ETH) and ERC-20 tokens in existence and connect to decentralized applications (dApps) on Ethereum. MetaMask has above 30 million active users as of 2021 and is appreciated for its simplicity.
2. Crypto.com Onchain Wallet
The onchain wallet in Crypto.com integrates with Li.Fi, a cross chain bridge, which allows it to integrate various blockchains so that users can start swapping them effortlessly. This enables the users to trade Ethereum, and Solana without having to rely on a centralized exchange. Crypto.com’s wallet is multi chain so it supports ERC-20 tokens as well as other popular cryptocurrencies.
3. Trust Wallet
One of the most versatile onchain wallets is Trust Wallet, as it supports over 60 blockchains. It enables you to send, receive, store different kind of digital assets and interacts with decentralized exchanges and dApps. In addition, Trust Wallet also offers staking feature with which users can start earning passive income by holding some of the cryptocurrencies.
Advantages of Onchain Wallets
1. Control and Ownership
Moreover, onchain wallets have the biggest advantage of letting you control your assets without any sort of compromises. Because you have the private keys, you are the only one that can authorize transactions. What this does is that it puts you in full ownership of the data and you don’t have to trust any third party service.
2. Security
Onchain wallets are decentralized wallets thus, making them less easier to hack compared to custodial wallets where assets are stored on centralized platforms. Onchain wallets, if secured according to best practices, provides unparalleled security.
3. Access to DeFi and dApps
The wallets can interact with decentralized finance (DeFi) protocols and decentralized applications (dApps) in a very easy way. This gives you an access to a variety of services from trading and lending to yield farming to NFT transactions.
Challenges and Risks
Onchain wallets have a lot of advantages but like any other crypto service comes with its own group of disadvantages and dangers:
- If you lose your private key or recovery seed, there is no way of recovering your funds. Back up your keys with multiple secure backups.
- Onchain wallets are just too complex for beginners who are not naturally into blockchain concepts. It can take time to get the hang of how to interact with dApps and deal with transactions.
- Depending on the blockchain you use, transaction fees will differ widely. For instance, the Ethereum gas fees are quite expensive when the network is congested.
Conclusion
Ultimately, onchain wallets give users the highest degree of control and security concerning their digital assets. Access to the blockchain is imperative for anyone dreaming to step into the realm of decentralised finance, or otherwise blockchain based apps, and they provide direct interaction with the blockchain. They have a bit of a learning curve and a few risk factors, yet the advantages far outweigh the disadvantages for individuals who really put importance on their privacy, security, and all out power over their crypto resources.
Which onchain wallet you should choose is all up to you, depending on your requirements which could be cross chain support, ease of use, or something more such as staking or integration with DeFi. As you go through your journey into the cryptocurrency world, it’s important to know the basics of how an onchain wallet works, whatever it is that you choose.
