Web3 wallets: A complete guide

Summary of Web3 wallets 📝

  • Web3 wallets allow crypto holders to secure, transfer and interact with their digital assets.
  • Web3 wallets are “non-custodial” – meaning the wallet owner has complete control of their funds
  • There are two main types of Web3 wallets – hardware wallets and software wallets.
  • Web3 wallets allow crypto holders to connect to decentralized applications (dApps) such as DeFi protocols, play-to-earn games and other parts of the Web3 economy.

What is a Web3 wallet? 🔐

Web3 wallets allow individuals to hold and use a wide range of digital assets such as cryptocurrencies and non-fungible tokens (NFTs).

Web3 wallets also help people connect to a wide variety of decentralized applications (dApps)

Once an individual connects their Web3 wallets to these services, they are able to use the assets stored in their wallet to take part in the Web3 economy. 

Some of the most popular parts of the Web3 economy include:

If you want to learn more about this user-centric, transparent and decentralized internet experience powered by blockchain technology, check out our article What is Web3?

web3 wallets image

Web3 wallets explained 🔍

Web3 wallets are referred to as a “non-custodial” wallet. 

Non-custodial means that the wallet’s owner is the only person that retains a copy of the cryptographic private key that secures the wallet. A wallet’s “private key” is like a password that grants access to any crypto assets associated with the wallet. 

Private keys are an important part of the cryptography behind cryptocurrencies. If you want to learn even more about this, you can check out the Kraken Learn Center article How do cryptocurrencies use cryptography? 

Meanwhile- with custodial wallets, the owner of the cryptocurrency wallet relies on a centralized company or service provider to keep the private keys secure on their behalf.

If you want to learn more about the difference between these two types of crypto wallets first, check out our Kraken Learn Center article What are custodial and non-custodial crypto wallets?

How Web3 wallets work ⚙️

Web3 wallets are a gateway to the digital economy. 

You’ll need a Web3 wallet to use any DeFi dApp, just as you need a bank account to access traditional financial services.

When a user creates a Web3 wallet, the wallet app generates four key components that allow it to work:

  1. Public wallet address – This is similar to an email address or phone number. When someone sends crypto to your wallet, they direct it to your wallet address the same way they would direct an email to your email address or a phone call to your phone number. 
  2. Password – Your password is your wallet’s first line of defense. When setting up a Web3 wallet, the wallet app prompts users to create a password. It’s important to recognize that this password is not your private key. It’s simply used to log into your wallet app the same way you use a password to log into a social media account.
  3. Seed Phrase – A seed phrase is a Web3 wallet’s core security mechanism, comprising a series of 12 - 24 words called a mnemonic phrase. If you lose the device where you installed your wallet app (for example, your phone) or need to reinstall the wallet app on a new device, you’ll need to enter the seed phrase on the new device. If you lose your wallet’s seed phrase, you may permanently lose access to your wallet. Similarly, if someone steals your seed phrase, they may be able to access your wallet and drain its contents without your permission. It’s vitally important to take all necessary safety precautions to protect your seed phrase when setting up your wallet in order to keep your crypto safe.
  4. Private Key – A private key is a long string of letters and numbers that only the wallet owner should be able to access. Just as every wallet has a public key (used to generate the wallet address), it also has a private key. When sending payments, wallet owners use their private keys to digitally sign each transaction. This signature confirms that the person who controls the wallet authorizes the transaction. Anyone can deposit assets to a person’s public wallet address, but only a wallet’s private key owner can authorize outbound transfers or withdrawals. Along with your wallet’s seed phrase, you must protect your wallet’s private key at all costs.

How to setup a Web3 wallet 🧑‍💻

Let’s look at how to set up one of the most popular Web3 wallets available, MetaMask.

MetaMask is a software crypto wallet that boasts tens of millions of users and supports a wide range of Ethereum-compatible crypto assets. 

It’s available to download as a mobile app or browser extension. We’ll look at how to download and create MetaMask wallet on Google Chrome.

  1. Go to the official website,
  2. Press the "download" option in the top right hand corner of the screen.
  3. Click “Install MetaMask for Chrome”. This action will direct you to the Chrome extension store
  4. Click “Add to Chrome” > “Add extension”.

Once added, you’ll be given the option to configure your privacy settings and be prompted to copy down your wallet recovery phrase.

Information on how to correctly copy down recovery phrases and other important security tips can be found in our Kraken Learn Center How to keep your crypto safe beginner’s guide.

When sending outbound transactions, interacting with dApps or swapping assets within the MetaMask wallet service, you’ll need to pay blockchain gas fees each time. These fees can vary in price depending on network congestion. 

Usually, weekends are the cheapest times to send payments or swap between different crypto assets.

You can track the current prices of gas fees using free online tools such as Etherscan.

Connecting your Web3 wallet 🤝

When you open a dApp in a web browser, the dApp’s website will include a prompt to connect your wallet, which you can typically find in the top right corner of the screen. 

For example, here are the basic steps for connecting to a dApp such as Uniswap (UNI):

  1. Clicking this button will open a menu of Web3 wallets that the chosen dApp supports. 
  2. If you have one of the supported options installed on your device, you can select it and it will initiate a connection with your Web3 wallet. 
  3. A small screen will ask you to click and confirm that you wish to connect with the application before completing the connection.

Types of Web3 wallets 📍

There are two main types of Web3 wallets:

  1. Software wallets
  2. Hardware wallets

Software wallets

Software wallets are typically web browser extensions or mobile apps, and remain connected to the internet at all times. 

Many crypto users feel software wallets prioritize convenience and ease-of-use over providing maximum security. 

When using software Web3 wallets, crypto holders can connect to DeFi dApps and make multiple payments quickly and easily. However, their permanent connectivity to the internet means software wallets are especially vulnerable to malware and hackers.

According to crypto market data website Coingecko, crypto users have created almost a hundred million software wallets, 75% of which were mobile device downloads. The majority of these downloads came from five of the most popular wallet apps:

  1. Metamask 
  2. Coinbase Wallet
  3. Trust Wallet
  4. Wallet
  5. Wallet

If you’re thinking about setting up a software wallet, these five apps may be worth considering. If you’re interested in a wallet with stronger security, you may wish to consider a hardware wallet instead.

Hardware wallets

Hardware wallets are physical devices used to protect NFTs and digital assets.

Unlike software wallets, hardware wallets spend most of the time disconnected from the internet. Because of this, many crypto users feel hardware wallets prioritize offering maximum security over convenience and ease-of-use. 

When a crypto holder wishes to make a transaction from their hardware wallet, they must manually connect their device to a computer and transfer their assets into a software wallet service.

To provide an additional layer of security, hardware devices are often PIN-protected.

One common misconception about hardware wallets is that they store digital assets inside the device – they don’t. They simply provide offline storage for your private keys. This makes it nearly impossible for online hackers to access your funds unless they have the hardware device in their hands. If you lose your device, you may still access your crypto assets by entering your seed phrase on a new device.

Four popular hardware wallet manufacturers include

  1. Trezor
  2. Ledger
  3. Blockstream
  4. Coinkite

Each offers several different hardware wallets. All devices are compatible with their respective maker’s software. This provides a dashboard for users to interact with, similar to a software wallet.

Connecting your hardware wallet to your PC and using it to access its respective software makes your wallet more secure, but adds potentially inconvenient extra steps to the process of using the wallet. 

It’s up to you to decide if you prefer the convenience of a software wallet or the enhanced security of a hardware wallet.

Chck out the Kraken Learn Center article What is a crypto hardware wallets? for even more detail.

The future of Web3 wallets 🔮

Creating a more open and accessible financial system is a core tenet of the Web3 movement. 

This means providing greater accessibility to financial products and markets.

Web3 wallets are an important tool for any looking to access and interact with all the innovative dApps the space has to offer.

To support the development of Web3 platforms, wallets continue to integrate new features that allow users to engage with the DeFi economy. 

These include lending, borrowing and staking capabilities which users can directly access from the wallet application. In this way, Web3 wallets often serve as an all-in-one hub for DeFi users and crypto owners.

Many Web3 wallets allow users to access hundreds of different dApps directly from their wallet service. 

Some of these services include popular DeFi dApps such as Aave (AAVE), Uniswap (UNI), Balancer (BAL) and many more. 

As DeFi continues to scale and innovate, Web3 wallets will likely become more accessible and user-friendly. 

People will be able to view their assets just like they view their accounts on current banking apps, as well as seamlessly transfer, lend, borrow and provide liquidity on DeFi exchanges.

As wallets become more available and intuitive, they will likely continue to streamline the mainstream adoption of crypto and serve as an important gateway to Web3.

Pros and cons of non-custodial wallets 🔄

It’s important to recognize that whoever holds a wallet’s private keys has complete control over all of the digital assets within the wallet. Because of that, many people in the crypto industry use the saying “not your keys, not your coins.”

Unlike custodial wallets, Web3 wallets grant their users complete and independent control over their private keys, and therefore, over their crypto stored in the wallet.

But, with that independence and control also comes a significant responsibility of keeping that crypto safe. 

While Web3 wallets grant individuals freedom over their finances, they don’t offer many of the same protections that are common in traditional custody solutions. With Web3 wallets, there is no hotline to call if you lose your password. There is no way to lock down your account if you have your device stolen. With Web3 wallets, the responsibility of protecting your funds is your’s and your’s alone.

To learn more about crypto custody, check out our What is crypto custody? Learn Center article.

Get started with DeFi on Kraken

Now that you have learned about Web3 wallets, are you ready to continue your crypto journey? Sign up for your Kraken account today and choose from hundreds of different cryptocurrencies to keep in you Web3 wallet.