What are Bitcoin Wallets ?
A wallet stores the information necessary to transact bitcoins. While wallets are often described as a place to hold] or store bitcoins, due to the nature of the system, bitcoins are inseparable from the block chain transaction ledger. A better way to describe a wallet is something that “stores the digital credentials for your bitcoin holdings and allows you to access (and spend) them. Bitcoin uses public-key cryptography, in which two cryptographic keys, one public and one private, are generated. At its most basic, a wallet is a collection of these keys.
There are several types of wallets. Software wallets connect to the network and allow spending bitcoins in addition to holding the credentials that prove ownership. Software wallets can be split further in two categories: full clients and lightweight clients.
Full clients verify transactions directly on a local copy of the block chain (projected to surpass 60 GB in 2016, which may be an inconvenience or impossible for some users). Lightweight (SPV/simplified payment verification) clients on the other hand consult a server to parse the block chain, and get only relevant transactions from the server (transactions to and from the user). When working with lightweight wallets, the user has to trust the server to a certain degree. The server cannot steal bitcoins directly, or intercept transactions, but the server can report faulty values back to the user.
With both types of software wallets, the users are responsible for keeping their private keys in a secure place.
Besides software wallets, Internet services called online wallets offer similar functionality but may be easier to use. In this case, credentials to access funds are stored with the online wallet provider rather than on the user’s hardware. As a result, the user must have complete trust in the wallet provider. A malicious provider or a breach in server security may cause entrusted bitcoins to be stolen.
Physical wallets also exist and are more secure, as they store the credentials necessary to spend bitcoins offline. Examples combine a novelty coin with these credentials printed on metal, wood, or plastic. Others are simply paper printouts. Another type of wallet called a hardware wallet keeps credentials offline while facilitating transactions.