Crypto Wallet Basics: Public Keys, Transactions, and Security Foundations
Welcome to the Basics of Security module — here, you’ll learn how cryptocurrency wallets work, how your funds are secured, and how to properly use reliable wallets for safe, long-term storage and interaction with the crypto ecosystem.
How Blockchain Works
Let’s start with how a blockchain functions — for example, Bitcoin or Avalanche.
A blockchain is a distributed global database stored across thousands of computers worldwide.
Anyone — even you — can become a participant in the network by running a node (e.g., a Bitcoin node) on your computer.
When you send a transaction from your wallet:
- It’s broadcast to all nodes in the network.
- It’s verified and added to the blockchain.
- It becomes a permanent, immutable record visible to everyone.
A transaction is simply a database record showing that a certain amount of funds was transferred from one address to another.
That’s the fundamental idea: blockchain is just a ledger — but a public, decentralized, and tamper-proof one.
What Is a Crypto Wallet?
There are many types of wallets — each differing in functionality, security, and supported currencies.
All wallets fall into two main categories:
- Custodial wallets
- Non-custodial wallets
We’ll start with non-custodial wallets — like the one you installed earlier (e.g., MetaMask).
Every wallet has a unique identifier — your address, where funds are received.
When someone wants to send you tokens, they need your public address.
Public and Private Keys
Your wallet contains two key elements:
Public Key (Address)
- A unique identifier for your wallet.
- Safe to share — it allows others to send you funds.
- Works just like a bank account number or card number.
Private Key
- The critical component that allows you to sign transactions.
- Proves ownership of your funds and authorizes transfers.
- Must be kept secret — anyone who knows your private key can spend all your funds.
The private key is linked to your mnemonic phrase (also called a seed phrase).
This phrase is your backup — it restores access to your wallet and funds if your device is lost or damaged.
How Transactions Work
Let’s break down what happens when you send a transaction (like when you sent 5 USDT to your second wallet earlier):
- Transaction creation — You specify the recipient address and amount.
- Signing with private key — Your private key digitally signs the transaction, proving ownership.
- Broadcasting to blockchain — The signed transaction is sent to the network.
- Recording — It’s permanently stored in the blockchain ledger.
Funds are not physically “inside” your wallet.
Your wallet only stores keys — not coins.
The actual tokens exist on the blockchain as records linked to your address.
Where Are the Keys Stored?
Your private keys are stored locally — only on the device where the wallet was created.
For example:
- If you create a wallet on your computer, the keys live there.
- If you create it on your phone, they stay in the phone’s storage.
They are generated randomly inside your wallet — not provided by any external server.
No cloud storage, no central server, no backup provider.
The wallet generates a key pair (public + private) and shows you the mnemonic phrase that encodes them.
Custodial vs. Non-Custodial Wallets
| Type | Who Holds the Keys | Control | Verification | Examples |
|---|---|---|---|---|
| Custodial | The platform (exchange) | Platform can block/freeze | Requires KYC and account | Bybit, Binance, Coinbase |
| Non-Custodial | You | Full self-control | No KYC, no intermediaries | Core Wallet, MetaMask, 1inch, Trust Wallet |
In custodial wallets, you rely on the platform’s approval to withdraw or transfer funds.
In non-custodial wallets, you create, sign, and send transactions yourself, without asking permission.
That’s why non-custodial wallets are considered the most reliable and independent form of crypto storage.
How Non-Custodial Wallets Work
A non-custodial wallet (like Core Wallet or MetaMask) is simply an interface for working with your keys.
Inside the wallet, there are no coins — only:
- Your private keys,
- The ability to create and sign transactions, and
- The functionality to send them to the blockchain.
Think of it as software that lets you interact with your digital assets, not store them.
Secure storage of funds = secure storage of private keys (seed phrase).
If you protect your seed phrase, your assets are safe.
If someone gains access to it, they gain full control of your funds.
Analogy: Wallets Are Like Design Tools
Imagine Photoshop, Illustrator, or Paint.
They are just interfaces for editing images — but the actual image file is stored on your computer.
- Photoshop doesn’t “own” your images — it just lets you work with them.
- Similarly, wallets don’t “own” your coins — they let you interact with them.
- The data (funds) is always on the blockchain; your wallet only gives you access to it.
Key Takeaways
- Custodial wallets are controlled by centralized entities — exchanges, platforms, or apps.
- Non-custodial wallets give you full control through your private keys and seed phrase.
- Public key (address) — used to receive funds.
- Private key — used to sign and send transactions.
- The wallet is only an interface; funds themselves are stored on the blockchain.
- Secure your seed phrase offline — it’s the master key to your funds.
- The security of your wallet = the security of your device.
If someone gets your private keys, they get your assets.
If you keep them safe — you’re in full control.
What’s Next
In the next post, we’ll explore:
- What a mnemonic phrase is,
- The different types of wallets,
- Their security levels, and
- Common vulnerabilities to avoid.
These materials are created for educational purposes only and do not constitute financial advice.