In The wallet stores the information needed to trade bitcoins. While a wallet is often described as a place to hold or store bitcoins, due to the nature of the system, bitcoins are inseparable from the blockchain’s transaction ledger. A better way to describe a wallet is to “store digital credentials held by bitcoins” and allow them to be accessed (and spent). Bitcoin uses public key cryptography, which generates two encryption keys, one public and one private. At the most basic level, a wallet is a collection of these keys.
Wallets work in a variety of ways. They have inverse relationships in terms of trust and computation requirements.
The integrated client verifies transactions directly by downloading a full copy of the block (over 150 GB as of January 2018). They are the safest and most reliable way to use the web because there is no need to trust external parties. The integrated client verifies the validity of mined blocks and prevents transactions in the chain that violate or change network rules. Due to their size and complexity, downloading and validating entire blockchains is not suitable for all computing devices.
Thin clients turn to embedded clients to send and receive transactions without requiring a local copy of the entire block. This simplifies the configuration of thin clients and allows them to be used in low-power, low-bandwidth devices such as laptops. For example smartphones. However, when using a lightweight wallet, the user must have a certain level of trust in the server, as it may report wrong values to the user. Light clients follow the longest block without guaranteeing it is valid, which requires trust in the miners.
Third-party internet services called online wallets offer similar functionality, but may be easier to use. In this case, the credentials used to access funds are stored at the online wallet provider rather than on the user’s hardware. Therefore, users must fully trust the wallet provider. Malicious providers or server security breaches can lead to the theft of your trusted bitcoins. An example of such a security breach occurred at Mt. Gox in 2011. This has led to the phrase “without the key, there is no bitcoin”.
Physical wallets store credentials needed for offline activities. A notable example is the invention with these references on the back. Paper wallets are simply printed on paper.
Another type of wallet, called a hardware wallet, maintains offline credentials while facilitating transactions.