Okay, so you have your head around the idea of the currently emerging Blockchain technology and you pretty much understand what a cryptocurrency is, now onto the next step — what is all this talk about a ‘digital wallet’?
While it can be quite a daunting task to get your head around all of these new concepts, we promise it’s far easier to come to terms with what a digital wallet actually is — it’s really as simple as it sounds.
Digital Wallets Explained
Think of your current wallet and how that works. 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 where you can keep track of how much you have and store it for as long as you like.
“It can be as simple as an app that you download on your phone just like someone may download the Commbank app to get access to their Commonwealth Bank transaction account.
“You can download an app on your phone which could be a Bitcoin wallet and you can send bitcoin to that wallet. They’re just simply a way to hold onto your cryptocurrencies.”
Essentially, that makes digital wallets based on the same idea as current online banking mobile applications that are available to display the funds you have stored with a bank.
The only difference? Digital wallets usually don’t deal with the current legal national currency that is the 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.
What Is Blockchain, Again?
In technical terms, blockchain is a peer-to-peer decentralised, distributed databaseknown as a ‘digital ledger’ used to democratise the management of records and online transfer of objects of value — the most popular of which at the moment is money — from one person or group to another. It’s comprised of permanent entries known as ‘blocks’ that are all connected, publicly monitored and unchangeable.
So what does that actually mean?
It means it’s a technology aimed at simplifying financial transactions of value — which can be in the form of anything from money to land titles to music royalties and identity information — between person to person without the intrusion of a third-party, such as a bank, government or streaming or hosting service.
The actual technology framework behind blockchain is very complex, however the plus side is — all of the really technical, complicated ‘nuts and bolts’ of a blockchain process happens behind-the-scenes.
If you want to know more, we’ve summed up all the really juicy bits of information that you need to know, here.
How Do Digital Wallets Work?
If you are interested in the back-end workings of a digital wallet, however, we’ve got you covered for that too.
Such as with anything that is built on blockchain technology, digital wallets come with both public and private keys. They’re essentially the digital address of your wallet and the password to get into it.
So, if you imagine your physical wallet once again — the fact that you and everyone else around you, or in a blockchain network if we’re talking digitally, can see the existence of that 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 — except 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.
“What’s happening is that you’ll never see the private key because the person or organisation who created the wallet holds onto the private key [in the app’s system],” Feeney said.
“There are advanced wallets which you can download onto your computer where you will be the only one ever who holds onto the private key.”
Are There Any Concerns?
According to Emma Poposka, the CEO of digital currency management company BronTech, that last choice between a mobile app wallet or an advanced program determines exactly where your private key is recorded and represents one of the major problems for blockchain technology and digital wallets.
In other words, it’s all about how secure you can keep your password.
“[Digital wallets are] as secure as you keep your password,” she told HuffPost Australia.
“This is one of the biggest problems for mainstream adoption. People are used to losing their passwords or their keys. People want to forget their password and ask for banks to supply their password.
“You don’t have that option with a private key — if you lose them you lose your money. The money will be in that address but you won’t be able to access it.”
That leaves the security of your digital wallet up to your discretion — whether it be you side with a mobile app connected to a system that stores your private key, or you put confidence in yourself to not lose your code.
Despite this Rob Hanson, a senior research consultant at the CSIRO’s Data61 innovation group, said the transparent nature of blockchain technology overrides any possibility for someone who may have your private key accessing your digital wallet, stealing your funds and getting away with it without anyone knowing.
“We can trust [blockchain] because we can see everything that happens,” he said.
“If I was to spend some money, and I give that to you in exchange for a service or good. We want everyone to know that you’ve now taken ownership of that.
“That’s what the blockchain gives us — It’s a distributed ledger that lets everyone see that action”
Can You Only Store Money In A Digital Wallet?
Here’s the great thing: because everything that is put onto a blockchain system — whether it be money or a source of information — is translated into a digital code, digital wallets can be used as a storage place for pretty much anything that has been digitised.
According to Hanson, one of the more significant pieces of information digital wallets can hold is that of your identity itself (in other words, your identification papers, passport information and visa details).
“A digital wallet is essentially a container in which you store information assets,” he said.
“Information assets can be tokens of value as per cryptocurrency or they can be crypto-keys (a digital code) which can be used for cryptocurrencies or for identifiers.
“You can store identifiers [and] we can start to store a digital identity too.”
And if that isn’t enough for a digital wallet to be the first step in changing the world as we know it — we’re not quite sure what is.