Kirankalyan Kulkarni [Kirankalyan Kulkarni] - Learn Bitcoin and Blockchain

There are several types of wallet available, in which we can hold our Bitcoins safely. E ach of these wallets has their own function and ways to operate.

The different kinds of the wallet are as follows:

• Software wallet: The software wallet is a Bitcoin application that sits on your computer's hard drive and allows you to completely control and secure your Bitcoins. Bitcoin Armory is an example of a software wallet and is supposed to be the most stable and secure wallet of all.
• Web wallet: The next type of wallet is a web wallet. Web wallets are more convenient than software wallets since they can be accessed to use your funds, Bitcoins, or assets from any device. So, you can access your web wallet on your Android or iOS device, your desktop and even on the internet.
• Cold wallet: The next type of wallet is called a cold wallet. Cold wallets are simply any kind of Bitcoin wallet that is not connected to the internet. These can be in paper form, or you can have wallets on USB drives as well.
• Brain wallet: The next type of wallet is the brain wallet. The brain wallet has its address generated by a computer program by hashing the passphrase with words that the user enters.
• Hardware wallet: The next type of wallet is the hardware wallet. The hardware wallet can only be accessed through physical contact with the wallet by the designated person, who owns the wallet. It stores the user's private keys in a secure hardware drive that is accessible only to the user and usually uses a fingerprint scanner or biometrics to access it.

In this chapter, we will discuss the advanced concepts of blockchain and the various protocols, challenges, and solutions to it. In the earlier chapters, we looked at the consensus protocol or algorithm as one of the most critical components, or building blocks, of the blockchain. When we speak about blockchain, the first thing that comes to mind is security and the blockchain consensus algorithm. We will look into these challenges and the solutions. From there, we will progress into smart contracts and how they work with the protocols in the blockchain.

In this chapter, we will cover the following advanced concepts of the blockchain:

• Consensus protocols, which are the running engine of the blockchain
• Types of consensus algorithms
• Key challenges in the blockchain to maintain privacy
• Smart contracts
• Distributed applications

Let's look at the various best practices to be followed to safeguard your assets if you want to be a revered cryptocurrencies investor or a person that wants to trade in cryptocurrency. Let's look at them very quickly in the following diagram:

Let's explore all the practices mentioned in the preceding diagram:

• Secure your private keys: Any typical Bitcoin transaction needs your private key to unlock its Bitcoin outputs or its value. Bitcoins are stored in wallets. These wallets are collections of public and corresponding private keys, where the public keys are represented by the Bitcoin address. If your Bitcoins are not at a Bitcoin address that you directly control, they are not under your control at all. It is said that if you do not have the keys, you do not have control of the Bitcoins. Basically, you only own the Bitcoins when you own the corresponding private keys. If a third-party obtains one or more of the private keys that are saved in your wallet, they can use any coins previously received by that public-private key pair or combination. Such a transaction doesn't have to be made using your wallet. It can be brought into any device, from anywhere. This is a design feature of Bitcoin that allows, among other things, the ability to import and export addresses between wallets. This is as good as your credit card PIN. You certainly do not want to let an unknown person know your PIN.