Wallets and keys
Your "balance" is a fact computed from the chain. The wallet holds the private keys that let you prove authorisation to change it.
In this lesson
- Explain seed phrases and key derivation
- Compare custodial and self-custody wallets
- Describe how a wallet signs a transaction
Custody in 12 words
A typical wallet generates one random seed, renders it as 12 or 24 words (BIP-39), and derives every key pair from it deterministically (BIP-32/44). The coins never "live" in the app — they live as unspent outputs on the chain, spendable only by whoever can sign for the derived keys.
| Wallet type | Who holds the keys | Trade-off |
|---|---|---|
| Custodial exchange | The exchange | Convenient, counterparty risk, KYC |
| Hot wallet (mobile/desktop) | You | Easy spending, exposed if device infected |
| Hardware wallet | You, in secure silicon | Safest day-to-day, needs the device |
| Multisig (2-of-3) | You + backups | Survives one lost key, needs coordination |
Example · The exchange hack that couldn't touch you
When an exchange collapses, only its internal ledger is lost. Users holding their own hardware-wallet keys were unaffected — the chain had no idea the exchange existed. "Not your keys, not your coins" is written in that history.
The seed phrase is the account
Anyone with the 12 words can drain everything derived from them, forever. Never type it into a website, never photograph it, never trust "support" DMs. If someone asks for it, it is a scam.
Derive and sign
Watch a seed generate a key pair in the lab, then sign a message only the private key could have produced.
What if I lose the wallet app?
Reinstall any compatible wallet and import the seed — addresses and balances reappear from the chain.
What if I lose the seed?
With self-custody there is no recovery service. That is the price of nobody else being able to move your funds.
Do hardware wallets hold coins?
No — they hold keys and sign offline; the coins stay on-chain.