Even if you don’t work in IT, you may have heard about blockchain technology and cryptocurrency, as well as the term “digital wallet”. But you don’t have to have a PhD in advanced computer science to understand how a digital wallet works.
A digital wallet works in a similar way to your current wallet or purse. You have access to your physical coins and notes, known in financial terms as fiat currency, and you can put them all into your wallet. Here you can keep track of how much you have, and store it for as long as you like.
The concept of a digital wallet works in exactly the same way, except the money you store, cryptocurrency, is digitised into online coding as is the technology behind your wallet. So a digital wallet is just an application that stores or holds onto your cryptocurrency.
It’s similar to downloading a banking app on your phone to get access to your transaction account. Now you can download an app on your phone that could be a Bitcoin wallet and you can send Bitcoin to that wallet. The wallet is just a way to hold onto your cryptocurrencies.
The only difference between your digital wallet and a banking app, is that digital wallets don’t deal with the current legal national currency (Australian Dollar) because they’re used to store cryptocurrencies such as Bitcoin, and they also don’t need a bank to operate because they’re built on blockchain technology.
Digital wallets come with both public and private keys. These are essentially the digital address of your wallet and the password to get into it. The existence of your wallet is basically the purpose that your public key serves. When it comes to your private key, that serves as the unique digital code that only you have access to in order to unlock what would essentially be a big padlock on the front of your physical wallet.
All of this happens within the mechanism behind whichever mobile wallet app or service you choose to use and you never actually see the process at work. But your password is the key to your funds. If you lose your (private key) password, you lose your funds as the only way to open your wallet is with your password. You cannot recover it like other online passwords.
So keeping your password secure but accessible is essential. That leaves the security of your digital wallet up to your discretion. You can get a mobile app connected to a system that stores your private key, or you put confidence in yourself to not lose your code.
While digital wallets are a long way from being mainstream, many retail and online stores are now taking cryptocurrency. So it may not be long before you add a digital wallet to your cash wallet to use when you buy your morning coffee.