How do popular crypto wallets like MetaMask, Rainbow and Phantom work?

Cryptocurrency wallets are a digital tool that allows users to securely store, send and receive various types of cryptocurrencies. It functions similarly to a physical wallet for traditional currency, but instead of holding physical cash and cards, it stores cryptographic keys that represent ownership of digital assets on a blockchain.

MetaMask, Rainbow, Rabby and Phantom are all non-custodial hot wallets. But what exactly does that mean?

Overview of cryptocurrency wallets

Public and private keys

Cryptocurrency wallets and their providers facilitate the management of digital currencies and provide the necessary security measures to protect them. These wallets store the cryptographic keys — public and private keys — which are essential for executing transactions on the blockchain.

  • Public keys can be shared and are used to receive funds.
  • Private keys should be kept secret as they are used to sign transactions and access the wallet's contents.

It's essential to understand that the actual coins or tokens are not exactly stored in the wallet; rather, the knowledge of the private key is what enables the wallet to move the funds. For instance, multiple wallets can have access to the same private key at the same time.

Hot vs cold wallets

Wallets can be categorized into hot and cold wallets based on their connection to the internet.

  • Hot wallets, which include web-based, mobile and desktop wallets, are always connected to the internet and offer convenience and ease of transactions. However, this connectivity also makes them more susceptible to cyber threats.
  • Cold wallets are offline storage options like hardware wallets or paper wallets. They enhanced security by making it significantly harder for unauthorized users to access the stored keys.

While cold wallets are preferred for holding large amounts or long-term storage due to their security benefits, whereas hot wallets are often used for day-to-day transactions given their accessibility.

Custodial and non-custodial wallets

Another distinction within cryptocurrency wallets is between custodial and non-custodial wallets. Custodial wallets, typically found on exchanges, hold the keys on behalf of the user, offering simplicity but at the cost of full control over one's assets.

Non-custodial wallets allow users to retain complete control over their keys and their assets, which aligns with the decentralized ethos of cryptocurrency. However, if a user loses access to their private keys or fails to properly back up their wallet, they risk losing their funds permanently.

Functionality of MetaMask, Rainbow and Rabby wallets

The functionality of specific hot wallets, such as MetaMask and Rabby, is centered on providing a user-friendly interface for interacting with various blockchain ecosystems.

MetaMask, for example, is primarily designed to integrate with the Ethereum network, enabling users to manage their ether and ERC-20 tokens with ease. It operates as a browser extension, facilitating seamless interaction with decentralized applications on the Ethereum blockchain. Users can securely store their private keys locally, which are encrypted and protected by a password. MetaMask has features that allow users to switch between different Ethereum-based networks and manage their digital identities across dapps without compromising security. However, its user interface hasn't been updated that much over the years and it has less focus on the user experience than newer wallets.

Rainbow is one wallet that has tried to take on the market leader MetaMask by offering a more user-centric design. It supports multiple blockchains, providing users with the flexibility to manage a diverse range of digital assets from various networks, while trying to make the whole experience a bit easier to understand. It also offers points for those who use its wallet, as it tries to motivate crypto users to migrate to its platform.

Similarly, Rabby Wallet aims to be a versatile and user-friendly wallet. Rabby's interface prioritizes the user experience, offering an intuitive design that simplifies complex blockchain interactions. This wallet also integrates with dapps, allowing users to engage with the broader ecosystem while maintaining control over their private keys.

Both MetaMask and Rabby Wallet are examples of non-custodial hot wallets. Users retain full control over their funds and private keys while getting access to online transactions.

What is Phantom?

Phantom is a non-custodial crypto wallet and browser extension similar to those mentioned above. However, its core difference is that it originated in the Solana ecosystem and natively supports the Solana blockchain. While many blockchains are compatible with Ethereum, Solana is built in the Rust programming language and isn't compatible with Ethereum. As a result, its ecosystem is somewhat fragmented from the rest of the crypto ecosystem that's compatible with Ethereum.

With its native support for Solana, Phantom lets users swap Solana-based tokens within the application and it supports Solana-based NFTs. As the blockchain itself is fast, the experience of using the Phantom wallet is also quite rapid. Since transactions on the blockchain are cheap, it also lets users split their tokens up across multiple wallets more easily too.

While Phantom originated with support for Solana, it has evolved into a multi-chain wallet. That means it now also supports Ethereum and other Ethereum-compatible blockchains. It has even added support for Ordinals and BRC-20 tokens, which are based on Bitcoin.

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Security measures in cryptocurrency wallets

Securing digital assets within cryptocurrency wallets is a paramount concern for users. Some aspects to consider include: 

  • Backing up your wallet: Regularly back up your digital wallet and store the backup securely in multiple locations, such as encrypted USB drives or paper backups stored in a safe place. Ensure that your backup includes your private keys or recovery phrase, as this is essential for restoring access to your funds if your wallet is lost or damaged.

  • Keeping software updated: Keep your digital wallet software and any associated applications or devices up to date with the latest security patches and updates. Developers often release updates to address security vulnerabilities and improve the overall security of the wallet.

  • Staying wary of phishing attacks: Be cautious of phishing attacks where malicious actors attempt to steal your login credentials or private keys by impersonating legitimate websites or services. Always verify the authenticity of websites, emails or communications before entering sensitive information or clicking on links.

  • Using cold storage: Consider using cold storage solutions for long-term storage of large amounts of cryptocurrency. Cold storage keeps your private keys offline, reducing the risk of unauthorized access or hacking.

  • Regularly monitoring account activity: Regularly monitor your digital wallet and associated accounts for any unauthorized or suspicious activity. If you notice any unusual transactions or account access attempts, take immediate action to secure your funds and report the incident to the appropriate authorities.

  • Educating yourself: Stay informed about the latest security best practices, threats and developments in the cryptocurrency space. Read up on topics such as wallet security, common scams and how to protect your digital assets effectively.

Despite the inherent risks associated with hot wallets due to their internet connectivity, the security features integrated into wallets like MetaMask, Rainbow and Phantom aim to strike a balance between accessibility and protection, enabling users to confidently manage their digital assets with a reduced risk of compromise.

Disclaimer: This article was produced with the assistance of OpenAI’s ChatGPT 3.5/4 and reviewed and edited by our editorial team.

© 2023 The Block. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

About Author

MK Manoylov has been a reporter for The Block since 2020 — joining just before bitcoin surpassed $20,000 for the first time. Since then, MK has written nearly 1,000 articles for the publication, covering any and all crypto news but with a penchant toward NFT, metaverse, web3 gaming, funding, crime, hack and crypto ecosystem stories. MK holds a graduate degree from New York University's Science, Health and Environmental Reporting Program (SHERP) and has also covered health topics for WebMD and Insider. You can follow MK on X @MManoylov and on LinkedIn.