How does a crypto wallet work?

The name is misleading. A crypto wallet does not hold coins the way a leather wallet holds cash. The coins, really just balances, live as records on a blockchain that thousands of computers share.

What the wallet holds is keys. A private key is a very large secret number. From it, the wallet works out a public key and then your receiving addresses. When you send crypto, the wallet uses the private key to make a digital signature. The network checks the signature and accepts the move.

That is the whole job, in three steps:

1. Make or import keys. Usually from a seed phrase of 12 or 24 words.
2. Show addresses and balances. The wallet reads the blockchain to show what your addresses control.
3. Sign. When you approve a transaction, the wallet signs it and broadcasts it.

This is why the backup matters more than the app. Lose the phone, and the seed phrase can rebuild the keys in another wallet. Lose the seed phrase and the device, and nobody can rebuild them, not even the wallet company.

It is also why “who holds the keys” is the first question for any app. On an exchange, the company holds keys for you. In a self-custody wallet, you do. Read hot wallet vs cold wallet next.