Why You Should Use an Open-Source Wallet

Digital currencies can improve financial inclusion. To get started with using digital currencies, you’ll need a digital wallet. But in choosing a wallet, the options do not need to be overwhelming. Here is why you should use an open-source crypto wallet.
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What is “open source”?

“Open source” means that the source code of a program is publicly available. If it is not, the program is “closed source.” Source code is computer code written in a language that humans can read. For computers to understand these instructions, the program must be translated (the technical term is compiled) into a language that machines can understand.

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The source code tells you exactly what the program will do, so with open-source software, anyone can examine the source code, learn how the program works, and compile the code into a usable program. As a result, many open-source programs are available for free. Most commercial software is closed source to protect the developers’ intellectual property.
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Why does open source matter?

Open-source software performs numerous vital functions in our modern world. Most internet servers run a wide variety of open-source programs—such as Linux as an operating system, Apache as a web server, WordPress as a content-management system, and more. BTC and many other digital currencies are also open source. Being open source allows anyone to start using these programs and to suggest improvements.

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Allowing anyone to see what the program does can also improve security, which may seem counterintuitive, but the idea has long been established as an essential cornerstone of cybersecurity. The National Institute of Standards and Technology (NIST) advises that the security of a system “should not depend on the secrecy of the implementation or its components.” An open design encourages examination, which increases the likelihood that someone will spot any errors and correct them.
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What is an open-source crypto wallet?

When talking about digital currencies, it’s important to note that the industry often relies on helpful but imperfect analogies. For example, your digital coins and tokens are not like physical coins and tokens. They do not actually reside in the program that we call a wallet. A blockchain is just a distributed ledger, and coins or tokens on it, are entries in that ledger. A digital currency wallet is a program that stores the keys that control specific entries in that ledger. When you make a transaction, you sign it with your private key to prove that you have the authority to transfer control of some coins from one account to another.

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An open-source crypto wallet, then, is a wallet with publicly available source code. While open source does not guarantee security, this openness lends credibility to the project. Instead of trusting that the developers made no serious mistakes and are not acting maliciously, you can verify the functions of the code yourself if you have the right skills. A closed-source wallet requires you to trust the developers, while an open-source crypto wallet requires you to trust only the code itself.
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What other features should you consider in a crypto wallet?

The most reliable wallet for a particular digital currency will probably be the official wallet created by the project’s developers since it will most likely support all of the features of that coin with a singular focus. But these wallets support only their respective coins, and many tend to have less user-friendly interfaces. As the cryptocurrency ecosystem grew, other developers have created third-party wallets. These wallets often provide many of the benefits of the dedicated wallets plus some additional useful features like in-wallet trading and multicurrency support. The following are some key wallet features that you should consider.
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Multisignature

Multisignature (often called “multisig”) wallets can help you protect your funds by requiring multiple signatures to approve a transaction. This approach can be beneficial if you hold a large amount of value in digital currencies and tokens (such as nonfungible tokens or NFTs) or if you want to prevent one person from controlling a group’s funds. Multisig wallets typically use one of two security setups: either n of n, where the number of keys used to create the wallet equals the number of keys used to sign transactions, or n of m, where some subset of the wallet’s keys must be used (like two of three or five of seven).
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Self-custodial

A self-custodial crypto wallet (also referred to as non-custodial) holds the actual keys that control the digital currencies rather than just giving you access to an account with a third party that controls your coins. Ideally, you want to be in control of your coins at all times. The industry's short history shows us that self-custody is the safest option, as long as you are careful not to lose your keys. In the most recent market crash, some exchanges halted withdrawals. Notably, both Voyager and Celsius froze customer accounts and have since filed for bankruptcy. Because users did not have control of their own private keys, they had no recourse when those companies stopped withdrawals, and whether regular users will recover any of their assets remains to be seen. Well-known crypto advocate Andreas Antonopoulos often says, “not your keys, not your coins.” Use a wallet that lets you control your own keys.

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Multicurrency

Support for more than one digital currency is a major benefit of many third-party wallets. Using individual wallets for all blockchains can quickly become cumbersome, especially if your holdings run the gamut of the crypto industry. Multicurrency wallets simplify managing your digital assets on multiple blockchains.
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Cold storage

A digital wallet must connect to the internet to send transactions, but a wallet needs no connection to receive transactions. You could think of this as having mail delivered to a post office box. Mail will arrive regardless of whether you are present to receive it. In the digital-currency world, a wallet connected to the internet is considered a hot wallet. A hot wallet is best used for relatively small amounts of funds, whatever you need to use regularly, since the internet connection makes the wallet more vulnerable to hacking. Think of a hot wallet as a checking account: something you use frequently.
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A cold wallet (cold storage) remains offline most of the time, connecting to the internet only when you need to send a transaction, which should be infrequently. It should be used for larger and longer-term holdings, like a savings account. For added security, you can even use multiple hot and cold wallets. By separating your funds this way, you can lower your risk of having your wallet compromised.
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How can you protect your keys?

No discussion of digital-currency wallets is complete without at least touching on protecting your keys. Because your wallet is essentially your digital bank, you are responsible for protecting your funds. You cannot talk to a bank teller and regain access to your account, so take care now to protect your keys.

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Most wallets will create a 12- or 24-word seed phrase when you generate your keys. These words in the correct order essentially are your keys, so to borrow from Gandalf, keep them secret. Keep them safe. At the very least, write them down and keep multiple copies in different secure locations. A better solution is to stamp numerous copies into stainless steel or titanium so that your seed phrase can survive many kinds of disasters.

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The cryptocurrency industry is an exciting field, and with a bit of preparation, you can navigate it safely. A good open-source wallet can be a safe and reliable way to protect your digital currencies. Evaluate your financial and security needs, download your wallet, choose a setup that works for you, and make sure that you back up your keys.