How a Crypto Wallet Differs to a Digital Wallet
The role of Web3 wallets
If you’ve dabbled in cryptocurrencies, you might have heard of a Web3 wallet, which is a crypto wallet designed for decentralized applications (dApps) and blockchain services, and sometimes built specifically for NFTs and Ordinals. A Web3 wallet is a gateway to a new kind of internet, where users have more control over their data and digital assets.
Whether you’re buying NFTs, staking tokens, or using decentralized finance (DeFi) platforms, you’ll need a Web3 wallet. These wallets provide access to tokenized assets, smart contracts, and decentralized services – and the user is in control of their digital identity and funds. This is a far cry from how digital wallets operate, where your identity and data are typically managed by centralized institutions. The terms “Web3 wallet” and “crypto wallet” are sometimes used interchangeably, but Web3 is focused on interacting with Web3 applications. They’re both used to store and manage digital assets, including crypto.
What a digital wallet actually is
A digital wallet stores your payment info electronically, allowing you to make transactions without entering your card details every time. Instead of pulling out a card or cash to pay, you can use your phone or another device that holds your payment credentials. Apple Pay, Google Wallet, and PayPal are examples. They link to your bank accounts or credit cards, allowing you to make payments online or in stores quickly and efficiently.
While convenient, these wallets are still very much connected to traditional financial systems. Your money flows through banks, card networks, and other middlemen, just in a faster, more modern way. However, a digital wallet doesn’t really hold your money. It’s more of a facilitator to process payments – your funds are still with the bank or other account. This is where it significantly differs from a crypto wallet.
Crypto wallets, hot wallets, and cold wallets
A crypto wallet doesn’t store payment information or link to your credit cards – it holds digital currencies like Bitcoin, Ethereum, or countless other cryptocurrencies. “Holds” meaning it holds the cryptographic keys that allow you to access, send, and receive your digital assets. You’re interacting directly with the blockchain – the decentralized network where these assets are recorded and stored. There’s no bank or centralized institution acting as an intermediary. This gives you more control over your assets, but it also means you’re responsible for keeping them safe.
Crypto wallets include hot wallets and cold wallets. Hot wallets are connected to the internet, while cold wallets are offline storage solutions like hardware devices. Hot wallets are easier to use for everyday transactions, but cold wallets offer stronger security since they’re not vulnerable to online threats. The trade-off between convenience and security is an important aspect to understand.
Control and ownership
One of the most significant differences between a crypto wallet and a digital wallet lies in ownership. With a digital wallet like PayPal or Apple Pay, you’re still relying on third parties (banks, credit card companies, or payment platforms) to process transactions and hold your funds. If one of these companies freezes your account or experiences technical difficulties, you might temporarily lose access to your money. Also, your transactions are often subject to fees and restrictions based on the provider’s policies.
A crypto wallet, meanwhile, gives you full control over your assets. You don’t need anyone’s permission to send or receive cryptocurrency, and no one can freeze your account. It’s true ownership, but it comes with a catch. If you lose your private keys (the long string of characters that grants you access to your wallet), you lose access to your funds. There aren’t the same recovery options of “forgotten password” pages, for example. Ownership in the crypto world requires a bit more responsibility, but it offers greater freedom.
Security
One of the most crucial distinctions between these two types of wallets is security. With digital wallets, security is mainly handled by the provider. Apple Pay, for example, uses encryption and tokenization to protect your card details. If something goes wrong, you rely on customer support or your bank.
Crypto wallets place the burden of security squarely on your shoulders. Because your wallet holds your private keys, losing them means losing access to your assets, and there’s no way to recover them if that happens. This is why it’s essential to use strong passwords, enable two-factor authentication (if available), and back up your private keys securely. Hardware wallets, which store your keys offline, provide another layer of protection, but they require careful handling, as even physical loss or damage can result in the permanent loss of funds. Some Web3 wallets offer more security features and make the security of your NFT collection, for example, a priority.
Underlying technology
At the heart of these wallets lies a deep technological difference. Digital wallets operate within traditional finance, relying on centralized servers and systems. When you make a payment using PayPal or Apple Pay, the transaction passes through a series of intermediaries – your bank, card network, and the wallet provider.
Crypto wallets use blockchain technology, which is decentralized. When you send cryptocurrency from one wallet to another, the transaction is recorded on a blockchain, a distributed ledger maintained by a network of nodes (computers). No single entity controls the blockchain, which is why crypto enthusiasts champion it as more secure and transparent than traditional financial systems.