Bitcoin wallet summary at glace.

[Charles-Tim]

Table of contents

Abstract
Introduction
Functions of bitcoin wallets
Types
Lightning bitcoin wallets
Open and close source wallets
Wallet Bitcoin Improvement Proposals (BIP)




Abstract
Bitcoin wallets are apps or hardwares that contain software that generate private keys and public keys, the private keys are keys to unlock funds (bitcoin) stored on blockchain, it also generates public keys which generates bitcoin addresses that are used for receiving and sending funds. I classify bitcoin wallets into three, according to the means of access, private keys management and how it generate private keys. There are some bitcoin wallets that was developed to support lightning network which make transaction fast at low fees. Some bitcoin wallets are also either open source or close source which depends on their source codes availability to the public or not. Lastly is the bitcoin improvement proposals that was accepted by developers in generating seed phrase, private keys, public keys and bitcoin addresses.



Introduction
Some people do not know what bitcoin wallet is, some say bitcoin wallet are used to store bitcoin. Is this right? No. So, what is bitcoin wallet? Bitcoin wallets are not for bitcoin storage, bitcoin are stored on bitcoin blockchain, the blockchain ledger are updated by miners. Bitcoin wallet only control access to the bitcoin by means of private keys, it is used for creating and signing of bitcoin transactions. So, with the use of wallet, you can access your bitcoin that is stored on bitcoin blockchain through the private keys created and stored on the bitcoin's wallet. Private keys are used to unlock funds from the blockchain.



Functions of Bitcoin wallet


1. Generation of private keys
Bitcoin wallets consist of a random number generator called cryptographically secure pseudo-random number gerenator (CSPRNG), this random number generator is used to generate the seed, the  seed is used to generate the private keys. The private key is the used to access funds stored on bitcoin blockchain. 



https://www.athenabitcoin.com/news/2018/4/9/how-to-use-a-paper-wallet

The image above  an example of a private key, it is personal and should not be revealed to anyone because it can be used to hijack the whole wallet or bitcoin from multicurrecies wallets.


2. Generation of public keys
The public keys are generated from private keys, and after the public keys are generated, it is used to generate the bitcoin addresses. Bitcoin addresses is genrated from public keys, the private keys can be stored offline, in which the bitcoin addresses are generated from public keys, this makes the private key safe.



https://github.com/bitcoinbook/bitcoinbook/blob/develop/images/mbc2_0512.png


The image above is an example of public keys, if reveled to anyone, the whole transaction history can be known.


3. The wallet control access to users bitcoin
With the use of private, the bitcoin wallet control access to bitcoin that is stored on bitcoin blockchain, the address generated can be used to send certain amount needed by the owner of the wallet to another wallet, it is used to automate payments.


4. Wallets is used to create and sign transactions
During sending of bitcoin to a recipient, the bitcoin wallet is used to create the transaction and also in signimg the transaction, if the transaction is not signed, it can not be completed, but wallets do this automatically aside few cases.


Types


Types according to private key management
In this case, there are two types, the custodial and the non-custodial wallets.

The custodial wallets
In this kind of wallet, the user has no private key, the wallet provider will have the key and stored the coins on cold storage, they only provided users with addresses. We can say the users have no coin stored on blockchain but only with their wallet provider, users can access the wallets with the use of email and passwords, example of such wallets is coinbase.

Non-custodial wallets
These are wallets that provided users with private keys, it also comes with seed phrase. The seed phrase is BIP39 and will be explained in short details below, in a true non-custodial wallet, no email is required and the seed phrase is used for wallet recovery, exampls are elcteum, bitcoin core, atomic, coinomi,  ledger nano, trezor and keepkey.


Types according to the means of access
There are wallets you can access through the web, phone or desktop apps and through wallet hardwares. There are two types:


Online/hot wallets
Online wallets are wallets that are connected online, their private keys are not stored offline, this makes them more vulnerable to hackers, they are not safe and secure like cold wallets, there are three types of online wallets:

Web wallets
This type of wallet is accessed through the web, you can connect to the website/site either through browsers on phones or computers. A good example is coinbase web wallet.

Mobile wallets
These wallets apps can be downloaded on the official sites of the wallet provider, it can be downloaded on app stores too but not advisable. Common, atomic and enjin wallets are good example. Some desktop wallets also have mobile wallets, examples are electrum and exodus wallet. Because people use phones more than computers, some wallets that are desktop also are having the mobile app available too now.

Desktop wallets
These wallets like bitcoin core, electrum, exodus, copay and armoney make use of computer applications, the application of the respective wallets are installed on computers.


Offline/cold storage
In these type of wallets, the private keys are stored offline, and the addreses are generated in a secure way from the public keys in which the private key can not be hacked, but some can contain security vulnerabilities that can result to hack. They are the safest means of storing bitcoin and other cryptocurrencies. There are two types:

Paper wallet
Bitcoin can be stored on papers but the paper can deteriorate over time, the paper could also be burned, it is difficult to access but some people still go for the security and safety because it stored private key offline. Paper wallets have one private key and an address which makes it not good for frequent transactions and it is not easily accessible.

Hardware wallet
Good examples are ledger nano, trezor, keepkey and airgapped devices they are a little expensive but worth their prices, it is still more easy to use than paper wallet. For storing high amount of bitcoin, it is highly recommended.


https://www.buybitcoinworldwide.com/wallets/ledger-nano-s/


Three good examples of hardware wallets, Keepkey at the left, ledger nano at the middle while trezor at the right side.


Types according to keys generation
According to how private keys are generated, there are two types of wallets:

Non-determistic wallets
The private keys this type of wallets contains are randomly geneated, all the private keys generated must have a back-up, which means you must keep the copies of all the private keys generated, if the wallet is not frequently back up, the funds on the private keys that are not back up will be lost if the wallet is inacceable. The first bitcoin wallet, bitcoin core is a good example.

Determinstic wallets
These wallets contain private keys that are generated just from a single seed, the wallet also generate many addresses from just a single private key or public key, the common type today are called hierarchical deterministic wallets. So, this makes it easy to use many addresses that only needs one private key back up unlike non-determistic wallet in which only one private key can generate one address.



Lightning bitcoin wallets
Because of high transactions fee of bitcoin, another means of transaction at low cost and faster transaction time was implemented, it is called layer 2 known as off-chain bitcoin network commonly called bitcoin lightning network. Two user will have to run a channel by connecting their nodes together through their lightning bitcoin wallet before making transactions. Blue wallet, wallet of satoshi, phoenix and bitcoin lightning Wallet are common examples.
Note: Before using bitcoin lightning wallet, you will need to move certain amount of desired bitcoin from the blockchain to the off-chain network. To know more about lightning bitcoin wallet, there are articles about it on this forum:

https://bitcointalk.org/index.php?topic=5202798.0
https://bitcointalk.org/index.php?topic=4940536.0

       

Open and close source wallets
Softwares are made of source code while app are softwares, apps are made of source codes, all wallets are made of softwares.  Source codes are either open source or closed source, so there are two types of wallets according to the source code, open source and close source wallets. Open wallets souce code are accessible to the public in which public have access to remove bugs, malware and other security issues making the wallet to function appropriately, but in a close source wallets, the source code is not accessible to the public. There is an article about open and close sources wallet on this forum:

https://bitcointalk.org/index.php?topic=5244810.0



Wallet Bitcoin Improvement Proposals (BIP)
BIP (32, 39,43, 44) are wallet bitcoin improvement proposal that were accepted by developers and are used in HD wallet creation.
BIP32/43. There are still other ones like the one used to create segwit addreses, and the one used in making transactions but this ate the basic ones to write about for now.

BIP32/43
Rhis represents hierarchical determinstic (HD) wallets in which many private keys can be derived from a single seed, and the private keys derived can still be used to derive children private keys and the children keys can derive grandchildren keys, this happens in form of a hierarchy. The BIP43 defines the HD wallet as a multipurpose wallet.

BIP39
This represents mnemonic code words known as seed phrase, the words are generated in a process before private keys are generated, this words can be imported, exported or back up on a shit of paper and used for wallet recovery.

BIP44
A bitcoin wallet can be made in such a way it can have two separate wallets that support bitcoin, but most are made to support bitcoin and other cryptocurrencies like ether and litecoin. So, BIP44 represents multiaccount wallets or multicurrency wallets.



Conclusion
These are just few facts about bitcoin wallets, and many things are not yet revealed, some people thinking bitcoin wallets are for saving bitcoin, this is wrong, bitcoin is stored on blockchain, and wallet stores the private keys that are used to unlock the bitcoin from bitcoin blockchain.

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[pooya87]

to generate the master seed

that is a new phrase i am hearing here for the first time.
we have:
seed which is the entropy used in KDFs to derive the child keys
seed phrase which usually wallets refer to as simply "seed" which is the mnemonic or the set of words representing the seed (entropy) used in BIP39 or the alternatives.
master keys which are representing the entropy used by BIP32 and are at the top of the hierarchy of BIP32 key derivation tree.
extended keys which are any BIP32 extended key that has both the key (private/public) and the chaincode which could be used to derive children keys.

Single-currency bitcoin wallets

that would be a "bitcoin wallet".

Multi-currency bitcoin wallets

and that is a "multicurrency wallet"
don't complicate the names more than they are.

Online/how wallets

hot?

[Maus0728]

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automatate

automate isn't it?

[Charles-Tim]

that is a new phrase i am hearing here for the first time.
we have:
seed which is the entropy used in KDFs to derive the child keys
seed phrase which usually wallets refer to as simply "seed" which is the mnemonic or the set of words representing the seed (entropy) used in BIP39 or the alternatives.
master keys which are representing the entropy used by BIP32 and are at the top of the hierarchy of BIP32 key derivation tree.
extended keys which are any BIP32 extended key that has both the key (private/public) and the chaincode which could be used to derive children keys.

You are right, I have changed it to seed it can be called root seed as well, it is the seed that will generate master private key and master chain code through HMAC-512(512 bit output) in a one-way hash function, the master public key is generated from the master private key through the elliptic curve multiplication process m * G. The child private keys can be generated using the master private key through HMAC-512(512 bit output) in a one-way hash function also.

seed which is the entropy used in KDFs to derive the child keys

I am still a beginner, the entropy which is in hexadecimal is used to generate seed phrase, so seed phrase represent entropy of 128 to 256 bits which is used to generate a the seed in 512 bit, through key-stretching function PBKDF2.


https://bitcointalk.org/index.php?topic=5255459.0

and that is a "multicurrency wallet"
don't complicate the names more than they are.

I have removed it. You are right, bitcoin wallets are wallets that support only bitcoin while any wallet supporting multiple coins are crypto wallets.

hot?

Yes, I meant hot wallet. I appreciate your points and corrections.

automate isn't it?

Yes, it is automate. I will appreciate your further corrections.

[o_e_l_e_o]

Bitcoin addresses can be genrated from private keys but this makes the private key not to be secure.

I don't understand what you mean here. Addresses are never generated directly from private keys - you must always generate the public key first. Generating public keys or addresses does not make the private key insecure, unless you are entering the private key in to some internet enabled site, service, or wallet to generate the public keys or addresses for you, which is obviously a bad idea.

The custodial wallets
In this kind of wallet, the user has no private key, the wallet provider will have the key and stored the coins on cold storage, they only provided users with addresses.

There is no guarantee that custodial wallets are storing your coins in cold storage. You have no idea how good or how terrible their security is, because you are placing all your trust in them. Given how many web wallets and similar have been hacked, it is safe to say that many custodial wallets are hot wallets, and therefore terrible from a security point of view.

In terms of cold wallets, you haven't mentioned airgapped devices, which if used correctly, are the most secure and most versatile cold wallets.

[pooya87]

I am still a beginner but the entropy I know which is in hexadecimal is used to generate seed phrase. And also, the master private key will be generated before child keys, the master keys generates the child keys.

the wikipedia definition of entropy is "In computing, entropy is the randomness collected by an operating system or application for use in cryptography or other uses that require random data." sometimes applications add another source to the OS generated entropy and through different cryptography functions (such as hashes, hmacs, KDFs or even AES) they derive another entropy to use.
it is somewhat similar in BIP32 and BIP39. starting with BIP39 we have an OS generated entropy which is the mnemonic then it is hashed using a KDF to generate the entropy used by BIP32 deterministically which means it will always generate the same thing BIP32 extended master key.

[Charles-Tim]

Bitcoin addresses can be genrated from private keys but this makes the private key not to be secure.

I don't understand what you mean here. Addresses are never generated directly from private keys - you must always generate the public key first. Generating public keys or addresses does not make the private key insecure, unless you are entering the private key in to some internet enabled site, service, or wallet to generate the public keys or addresses for you, which is obviously a bad idea.

You are right, addresses are to be generated from public keys, what I was trying to say is that private keys can be online in which it is used to first generate the public keys, while addresses will be generated by public keys, in this way, private key may be so unsafe and unsecure. But, like in cold wallets, the private keys are stored offline, while the already generated public keys are used to generate addresses which is safer. I was not right with the statement and I will correct it.

The custodial wallets
In this kind of wallet, the user has no private key, the wallet provider will have the key and stored the coins on cold storage, they only provided users with addresses.

There is no guarantee that custodial wallets are storing your coins in cold storage. You have no idea how good or how terrible their security is, because you are placing all your trust in them. Given how many web wallets and similar have been hacked, it is safe to say that many custodial wallets are hot wallets, and therefore terrible from a security point of view.

You are right, my first wallet was a custodial wallet, I have to move my funds to a non-custodial wallet later because I do not know if they use cold wallet storage, and the worst part of it is that I am not the owner of coins stored on it on the blockchain wallet. Non-custodial wallet generates the private key that makes me the owner of my bitcoin on blochchain.

In terms of cold wallets, you haven't mentioned airgapped devices, which if used correctly, are the most secure and most versatile cold wallets.

To tell the truth, I do not know about this wallet, I will add airgapped devices as part of the cold wallets. Thanks.

I am still a beginner but the entropy I know which is in hexadecimal is used to generate seed phrase. And also, the master private key will be generated before child keys, the master keys generates the child keys.

the wikipedia definition of entropy is "In computing, entropy is the randomness collected by an operating system or application for use in cryptography or other uses that require random data." sometimes applications add another source to the OS generated entropy and through different cryptography functions (such as hashes, hmacs, KDFs or even AES) they derive another entropy to use.
it is somewhat similar in BIP32 and BIP39. starting with BIP39 we have an OS generated entropy which is the mnemonic then it is hashed using a KDF to generate the entropy used by BIP32 deterministically which means it will always generate the same thing BIP32 extended master key.

I appreciate. I still only know the basic about entropy but with time I will know more from articles and from you people. From your post, I can now understand that not only in seed phrase generation that entropy can be generated but just a good example.

[khaled0111]

the wallet also generate many addresses from just a single private key or public key, the common type today are called hierarchical deterministic wallets.

A deterministic wallet uses the seed to generate multiple private keys not just a single one. Each public address is derived from its corresponding private key.
 

So, this makes it easy to use many addresses that only needs one private key back up unlike non-determistic wallet in which only one private key can generate one address.

This is not true unless you are are referring to the extended private key (xPriv). if so, then yes, by backing up the xPrv you can recover all your private keys.
However, it's adviced to back up the seed as it's more convenient and more practical.

[Maus0728]

To tell the truth, I do not know about this wallet, I will add airgapped devices as part of the cold wallets. Thanks.

Airgapped simply means that the device is never and will never be connected to the internet to protect private keys from leaks or attack that can happen on the internet.

They can be old laptops or reserved old smartphones without any internet connection and bluetooth capabilities. You might as well read this guide written by sowik.
[1] [Guide] Secure air-gapped crypto wallet storage method

[o_e_l_e_o]

what I was trying to say is that private keys can be online in which it is used to first generate the public keys, while addresses will be generated by public keys, in this way, private key may be so unsafe and unsecure.

Ahh, I see, that makes more sense. Yes, for maximum security your private keys should be kept offline, and either your master private key or individual addresses used online or in watch only wallets.

To tell the truth, I do not know about this wallet, I will add airgapped devices as part of the cold wallets.

It essentially involves using a dedicated computer which will never be connected to the internet again. An old laptop is a good choice, or you could buy a cheap device such as a Raspberry Pi specifically for this purpose. Ideally, remove the WiFi card, ethernet adapter, and any other connective hardware it has such as Bluetooth. Format it and perform a clean install of your chosen OS (preferably Linux), and then set up whole disk encryption. Set up your bitcoin wallet on it, and export the master public key to use as a watch only wallet on your main internet enabled computer.

A deterministic wallet uses the seed to generate multiple private keys not just a single one. Each public address is derived from its corresponding private key.

Strictly speaking, the seed phrase is only used to generate a single private key - the master private key. All other private keys are ultimately derived from the master private key at various derivation paths.

[Charles-Tim]

To tell the truth, I do not know about this wallet, I will add airgapped devices as part of the cold wallets. Thanks.

Airgapped simply means that the device is never and will never be connected to the internet to protect private keys from leaks or attack that can happen on the internet.

They can be old laptops or reserved old smartphones without any internet connection and bluetooth capabilities. You might as well read this guide written by sowik.
[1] [Guide] Secure air-gapped crypto wallet storage method

To tell the truth, I do not know about this wallet, I will add airgapped devices as part of the cold wallets.

It essentially involves using a dedicated computer which will never be connected to the internet again. An old laptop is a good choice, or you could buy a cheap device such as a Raspberry Pi specifically for this purpose. Ideally, remove the WiFi card, ethernet adapter, and any other connective hardware it has such as Bluetooth. Format it and perform a clean install of your chosen OS (preferably Linux), and then set up whole disk encryption. Set up your bitcoin wallet on it, and export the master public key to use as a watch only wallet on your main internet enabled computer.

That means any device that can store private key offline can be called airgapped device. I really understand your points but I have just a question to ask. What about two wallets like electrum on phones or laptop in which one is used as cold wallet and the other as watch-only wallet. That means the one used as a cold wallet which store private key offline can be called airgapped device as well?

[Maus0728]

That means any device that can store private key offline can be called airgapped device. I really understand your points but I have just a question to ask. What about two wallets like electrum on phones or laptop in which one is used as cold wallet and the other as watch-only wallet. That means the one used as a cold wallet which store private key offline can be called airgapped device as well?

Absolutely.

Cold storage simply refers to a process of storing your bitcoin and private keys offline which means it is entirely separated from being connected to any internet access to reduce online threats. While airgapped refers to a set of network security measures to make sure that the particular device has no ability to connect on the internet as well.

Moreover, watching-only wallet is usually stored in an online device to see the transaction that occured and the bitcoin addresses you are using. When someone uses Electrum that is installed in an airgapped device such as old laptop, the watching-only wallet is only used to create an unsigned transaction that is transported using USB stick to the offline(airgapped) storage to be able to sign the unsigned tx and transfer again the signed transaction from airgapped to watching-only wallet to broadcast the signed transaction to the bitcoin network. Thus, it will not defeat the purpose of having an air-gapped device.

[o_e_l_e_o]

the watching-only wallet is only used to create an unsigned transaction that is transported using USB stick to the offline(airgapped) storage to be able to sign the unsigned tx

While this is one way of doing it, I prefer to use QR codes where possible. Create unsigned transaction -> display QR code -> scan QR code with airgapped device -> sign transaction -> display QR code -> scan QR code with watch only wallet -> broadcast. This has the advantage of never having to plug removable media in to your cold storage device, and so preventing any possibility of malware being transferred to your cold storage device or your private keys being removed via the USB. It's an improbable vector of attack, sure, but it is still one which exists.

It does have the added disadvantage of requiring preferably two webcams. I say two, as if you only have one, you have to move that device back and forth between your airgapped and your live devices, which could expose you to the same risk as using a USB drive as above. However, since most laptops have a built in webcam this isn't a problem for most people, although I would always advocate for everyone to keep your camera covered when you are not using it. You can buy adhesive webcam covers for a couple of bucks.

[Charles-Tim]

While this is one way of doing it, I prefer to use QR codes where possible. Create unsigned transaction -> display QR code -> scan QR code with airgapped device -> sign transaction -> display QR code -> scan QR code with watch only wallet -> broadcast. This has the advantage of never having to plug removable media in to your cold storage device, and so preventing any possibility of malware being transferred to your cold storage device or your private keys being removed via the USB. It's an improbable vector of attack, sure, but it is still one which exists.

You are right about this, using QR code makes the whole process more safe and secure. Aside safety, QR code also makes it more convenient to use. This type of watch-only and cold storage on two electrum wallets would have not even been possible on phones if there is no alternative to USB stick. The QR code is a good replacement or alternative to USB stick.

[GeorgeJohn]

This topic really educate me about things i dont know concerning btc wallet,after reading this text I comprehended so much of bitcoin wallet.
Its good for a begginers to go thoroughly through some posts made by the seniors.
Now i have noticed the rudiments of bitcoin wallet.

All newbies should know that observation and carefulness contributes for quality post