What Is a Crypto Wallet Address? A Beginner's Guide!

Creating a wallet address is the first step to interacting with any blockchain network. Whether you're looking to store cryptocurrencies, trade tokens, or engage with decentralized applications, having a crypto wallet is essential to unlocking these activities. It is your gateway to the digital world, where you can securely manage and transact your digital assets.

If you've already used a crypto wallet and own tokens, you likely have experience with common wallet practices, such as safeguarding your private keys and signing transactions. These actions are critical to ensuring that only you have access to your funds and that transactions on the blockchain are authorized securely. Understanding these principles is vital for confidently navigating the blockchain ecosystem.

This piece will provide a non-technical breakdown of what a crypto wallet address is and how crypto wallets operate. You’ll gain insights into the cryptographic operations that make wallet addresses uniquely secure and capable of interacting with blockchains.

What is a Crypto Wallet Address?

A blockchain ledger functions similarly to a bank’s book of accounts, and a wallet address operates like a bank account number. While blockchain technology, notably Ethereum’s Virtual Machine (EVM), allows for more complex operations beyond simple transactions, such as running decentralized applications, for this article, we will focus on its bookkeeping and transactional aspects.

Continuing with the analogy, you share your bank account number when you request money from someone. This identifier enables others to send you funds but doesn’t give them the ability to access or withdraw from your account. Similarly, you share a wallet address to receive cryptocurrency. It’s a public string of characters that allows others to send you crypto, but it does not grant access to the funds stored within the wallet.

In the Ethereum network, a wallet address is a 42-character hexadecimal string (consisting of both letters and numbers) that always begins with "0x." This address serves as your identity in the blockchain’s digital world. For example, if someone wants to send you Ether (ETH), they need your wallet address.

Just like a bank maintains a ledger of account debits and credits, the blockchain keeps track of wallet addresses and the transactions associated with them. This publicly viewable ledger can be accessed using blockchain explorers, which provide detailed information about the flow of assets to and from a given wallet address.

Private Keys

You authorize bank transactions using personal identifiers like a signature, PIN, or social security number. These identifiers are unique to you, but anyone who obtains access to them can control your account, so it's important to keep your banking credentials secure.

Similarly, a crypto wallet address is controlled by a private key—another hexadecimal string that serves as the cryptographic "password" to your wallet. If someone gains access to your private key, they can control the funds in your wallet. Therefore, it’s crucial to keep your private key secret and offline.

For this reason, wallet addresses are often referred to as public keys. They’re shared publicly to receive funds, while the private key is kept secret to authorize transactions.

Primary Functions of a Wallet Address

• Sending/Receiving Crypto: The most fundamental function of a wallet address is to send and receive cryptocurrency. You receive funds at your public address and sign transactions using your private key.
• Digital Identity: A wallet address acts as your digital identity in the decentralized world. It’s used across various blockchain-based platforms to identify you as the user. Buying an NFT marks the wallet address as owner, and the public tracks your on-chain activity.
• Accessing DApps and Smart Contracts: Wallet addresses also allow you to interact with decentralized applications (DApps) and smart contracts. When you connect your wallet to a DApp, your wallet address identifies your account and facilitates interactions with the underlying blockchain.
• A Ledger of Owned Assets, Public Verification: Your wallet address holds a public ledger of all the assets you own and your transactions. Most chains enable transparency and public verification, as anyone can look up your wallet on a blockchain explorer to view its transaction history and balance. However, your identity remains pseudonymous unless linked to your real-world identity.

How Wallet Addresses Work

In the previous section, we highlighted that knowing a bank account number doesn’t grant access to the funds within. Accessing and controlling a bank account requires private credentials, such as a PIN or signature, to authorize transactions. However, it raises an interesting question: why can’t someone spend money with just the account number?

The reason lies in the rules enforced by banks. These rules are not only created by financial institutions but also protected by regional laws and regulations. In other words, the human element—through banks and legal systems—ensures the security of your account.

On the other hand, blockchain operates as an autonomous, deterministic system. It runs based on programmed rules and mathematically solvable operations without the need for human oversight or the enforcement of arbitrary laws. These characteristics are the foundation of its decentralized nature. Blockchains cannot rely on human intervention to secure transactions; they must depend entirely on cryptographic principles.

In simple terms, while bank accounts function based on regulatory laws and enforcement, crypto wallets operate purely on cryptographic laws. These cryptographic processes give wallet addresses their security and enable them to function without a central authority.

This section will break down the cryptographic processes behind wallets, explaining why they are secure and how they enable trustless transactions in the blockchain ecosystem.

Public Key Cryptography

Cryptography is a method of protecting information using codes and mathematical concepts. It involves transforming information into a form that only authorized individuals can access or understand. This process of obfuscating information is also called encryption.

One key concept in cryptography is Public Key Cryptography (PKC) or asymmetric cryptography. The system uses a pair of keys to encrypt and decrypt information. This method is essential for blockchains, including Ethereum, to ensure secure user communication and transactions. With PKC, two keys are involved:

• Public Key: This key is shared with others to verify transactions or encrypt information. It acts as your public identifier on the blockchain.
• Private Key: This key is kept secret and is used to sign transactions, proving your ownership or authorization to move funds. It must remain secure, as it grants control over your crypto assets.

Ethereum generates these key pairs using a specific PKC algorithm called the Elliptic Curve Digital Signature Algorithm (ECDSA). While there are many different PKC algorithms, Ethereum relies on ECDSA because it allows users to interact permissionlessly, meaning anyone can participate in the network. Using a common PKC algorithm ensures that everyone can communicate and transact uniformly.

An essential feature of this cryptographic system is that while the private key can generate or derive the public key, it’s impossible to do the reverse — you cannot derive the private key from the public key. This property is akin to security laws in traditional banking, where certain protections are in place to safeguard assets.

To simplify, imagine PKC algorithms working like a mailbox. Your mailbox has a locked chamber (similar to the public key), and anyone can send you letters or funds by dropping them in through the tiny slit. However, only you have the key (private key) to unlock the mailbox and retrieve the contents.

The next section will provide an overview of how these cryptographic algorithms are applied in Ethereum’s ecosystem to secure accounts and transactions.

How Ethereum Generates Addresses

Let’s explain each step of generating an Ethereum address in more detail and highlight the significance of each part. Understanding these steps involves both mathematical and cryptographic concepts.

Step 1: Generating the Private Key

A private key is a random number between 1 and 2,256. It is a huge number, represented in 64 characters using the hexadecimal system (including letters and numbers). Ethereum relies on strong randomness to ensure the security of private keys. If the randomness is weak or predictable, an attacker could potentially guess or derive someone’s private key, allowing them to steal the associated funds.

Why is it important?

• The private key is fundamental because it grants ownership and control over the funds associated with an Ethereum address.
• Ethereum’s security relies on the fact that it is computationally infeasible to guess someone's private key due to the vastness of the key space (2^256 possibilities, or approximately 10^77).

Example of a private key: 0x9c1c77ab91d10d71012d61dcb7b12aef8d509a2d13ed7c54f1e347b89720dc40

This key is generated using a random function. You can use it to store ETH, but since it's public in this article, anyone can claim assets sent here.

Step 2: Deriving the Public Key

Ethereum (like Bitcoin) uses Elliptic Curve Cryptography (ECC), specifically the secp256k1 elliptic curve, to derive the public key from the private key using geometric principles. ECC is preferred in blockchain because it provides a high level of security with smaller key sizes compared to other methods like RSA. 

Elliptic Curve Point Multiplication:

• The public key is derived through a multiplication operation on the secp256k1 curve, resulting in a new point on the curve representing the public key.
• The speciality of this multiplication in the ECDSA algorithm is that it is one-way, meaning it is virtually impossible to reverse this multiplication and end up with the private key. This difficulty comes from the discrete logarithm problem in mathematics on elliptic curves, a well-known problem in mathematics (more on it later).

What Makes Public-Private Key Unbreakable?

One may try to brute force the ECDSA algorithm. As explained before, the private key is a huge number between 1 - 2^256; you may apply the same multiplication to each number one by one until you end up with the said public key. This process is so resource-intensive that it's nearly incomprehensible. For perspective:

• If you had a supercomputer that could perform one trillion guesses per second (10^12 guesses/second), it would still take, on average, 2^256 / (10^12 guesses/second) = 10^65 seconds.
• This number is far longer than the age of the universe, which is about 13.8 billion years (~10^17 seconds). Even with the fastest computers on Earth, it would take billions of times longer than the universe's age to have a reasonable chance of guessing a single private key correctly.

Step 3: Deriving the Ethereum Address from the Public Key

Ethereum addresses are not simply the public key but are derived from it using a cryptographic hashing algorithm. Specifically, Ethereum uses Keccak-256 (a variant of SHA-3) to hash the public key. The hash function creates a 256-bit (64-character hexadecimal) string.

Only the last 20 bytes (40 characters) of the Keccak-256 hash are used to represent the Ethereum address. This truncation forms the standard 40-character Ethereum address. Adding the “0x” before every address gives the 42-character wallet address we are familiar with.

The Keccak-256 hash ensures that Ethereum addresses are uniformly distributed and unique for each public key. Even a minor change in the public key will produce a vastly different address (thanks to the avalanche effect in cryptographic hash functions).

Why is it Important?

• The Ethereum address is the publicly shared identifier allowing others to send you transactions or tokens. It doesn’t expose your public or private key directly, adding an extra layer of abstraction and security.
• Hashing the public key ensures that the address size is manageable and that the chance of collision (i.e., two users with the same address) is practically zero.

Recap of Key Concepts and Importance

1. Private Key Generation: Security is established at this stage through randomness. Due to its size and the secure random generation process, the private key should be impossible to guess.
2. Elliptic Curve Cryptography: Public keys are derived using elliptic curve point multiplication, making the system efficient and secure while keeping key sizes manageable. The one-way nature of elliptic curve cryptography ensures that private keys remain secret.
3. Address Derivation: Ethereum addresses are obtained through Keccak-256 hashing, which ensures uniqueness, consistency, and a fixed address length. Only the last 20 bytes of the hash are used, keeping the address size small enough for practical use.

Each step ensures that Ethereum addresses are secure, efficient, and resistant to common cryptographic attacks. Together, they form the backbone of Ethereum’s account system and transaction model.

Ethereum Ecosystem Addresses

One of the advantages of the Ethereum ecosystem is that your Ethereum wallet address works seamlessly across all Ethereum Virtual Machine (EVM)-compatible chains. This interoperability exists because these chains use the same cryptographic principles for signing and verifying transactions.

If a blockchain runs on the EVM, it uses the Elliptic Curve Digital Signature Algorithm (ECDSA), the same algorithm Ethereum uses. Since all EVM-compatible chains rely on this shared algorithm, you can use the same address on multiple chains, including Ethereum Layer 2 networks like Arbitrum, Optimism, and others.

Same Addresses, Not Tokens

It's important to note that while you can use the same wallet address across these networks, balances, and tokens on one chain won’t automatically appear on another. For instance, holding a token on a Layer 2 chain won’t be visible on Ethereum’s mainnet, even though you're using the same address. The token's balance is recorded in that specific network's smart contract ledger. If the transaction is recorded on Layer 2, the token balance will only be visible on that Layer 2, and the same applies to the Ethereum mainnet.

In other words, while your wallet address remains constant across these chains, the visibility of tokens depends on which blockchain’s smart contracts hold the record of your transactions. So, you'll need to interact with the specific Layer 2 network or bridge assets to Ethereum’s mainnet if you want to transfer balances between them.

Creating and Using Wallets

When setting up a crypto wallet, all the complex steps of constructing an address, such as generating private and public keys, are handled automatically by wallet apps. Users don’t need to worry about the cryptographic operations behind the scenes. Instead, they simply follow the steps provided by the app to create and secure their wallet. Here’s how the process works:

Choose a Wallet

First, decide whether you need a hot wallet (connected to the internet, like MetaMask) or a cold wallet (offline and more secure, like Ledger). A hot wallet is more convenient for frequent transactions, while a cold wallet offers better protection against hacks since it’s used offline. Choose a trusted wallet provider based on your needs. You can refer to some recommendations on the best Ethereum wallets or hardware wallets on the Coin Bureau.

Set Up the Wallet

Once you’ve chosen a wallet, download the app or set up the hardware device and follow the instructions. The key step is securing your seed phrase, a series of 12 or 24 random words that act as a backup for your wallet. After securing this phrase, the wallet app automatically generates your private key, public key, and wallet address.

Offline Setup for Better Security

If possible, generating your wallet’s private key offline (using a cold wallet) increases security. Since cold wallets don’t connect to the internet, they reduce exposure to potential online threats, such as hacks or malware.

Start Using Your Wallet

With your wallet set up, you can now buy, send, or receive cryptocurrencies. You’ll use your wallet address to receive funds and your private key to sign transactions when spending or sending crypto to others.

By following these steps, your wallet is ready to store and manage your digital assets safely.

Is Quantum Computing a Threat to Blockchain Technology?

While discussing cryptography earlier, we discussed the discrete logarithm problem, making it virtually impossible to reverse elliptic cryptography like the ECDSA.

Quantum computers are a potential threat to blockchains due to the Elliptic Curve Digital Signature Algorithm. We discussed how even the best modern computers would take an astronomical amount of time to break ECDSA cryptography by brute-forcing the private key from the public key. This is because of the immense number of possible key combinations (around 2^256), which classical computers would need to try individually.

However, quantum computers operate very differently. While a classical supercomputer would attempt every possible combination sequentially, quantum computers can perform certain calculations across very large datasets simultaneously using the principles of quantum mechanics.

This ability, known as quantum parallelism, allows quantum computers to solve problems much faster. In particular, Shor’s algorithm can efficiently solve the elliptic curve discrete logarithm problem, which underpins ECDSA. This innovation makes it feasible for quantum computers to reverse-engineer private keys from public keys much faster than classical computers.

Discussions in the Ethereum Community

In response to the threat posed by quantum computers, the Ethereum community has been discussing replacing the ECDSA signing algorithm with more secure, quantum-resistant alternatives. One proposed solution is to use lattice-based cryptography.

While ECDSA uses elliptic curves, essentially two-dimensional mathematical objects, lattice-based cryptography adds many more dimensions. In elliptic curve cryptography, the number of possible key combinations is finite but extremely large, which has so far been enough to ensure security. However, quantum computers could significantly reduce the time needed to break these combinations.

With lattices, we can add 2, 3, or even more dimensions, exponentially increasing the mathematical problem's complexity. The added complexity makes it far more difficult for quantum computers to break the encryption. While elliptic curves limit the number of combinations to a very large but finite space, lattices expand that space exponentially by adding more dimensions, creating a quantum-resistant cryptographic method.

What is a Crypto Wallet Address: Closing Thoughts

This article aimed to provide a deeper dive into the workings of crypto wallets, exploring how they serve as the cornerstone of blockchain interactions. While we touched on some technical concepts surrounding cryptography and blockchain architecture, I hope that understanding these key principles has given you a greater appreciation for the intricacy and robustness of the technology behind crypto wallets.

Grasping these foundational elements is crucial for anyone looking to understand blockchain technology and its potential fully. With this knowledge, you can confidently approach the space, making informed decisions as you integrate blockchain into your financial life or explore its broader applications.

As blockchain continues to evolve, these core concepts will remain at the heart of how we interact with decentralized systems, helping shape the future of finance and beyond.