What is a cloud wallet?

Cloud wallets are yet to really take off within the cryptocurrency industry, so we very rarely hear about them. However, thanks in large part to Huobi Wallet, they do exist — and they promise to make looking after your cryptocurrencies a lot easier. The problem is that cloud wallets are very restrictive compared to other software wallets, and they may not be as safe as they claim to be.

In this AAG Academy guide, we’ll explain what cloud wallets are and how they work, as well as how they compare to traditional software wallet options. We’ll also explain their disadvantages and answer some common questions around cryptocurrency wallets.

What is a cloud wallet in cryptocurrency?

Cloud wallets are a special type of software wallet that provide access to your cryptocurrencies and NFTs. Unlike other software wallets, cloud wallets allow users to manage their digital assets without having to worry about private keys. Rather than being managed by the wallet owner, the keys are held in what’s called “key escrow,” where they can be accessed at any time.

In other words, rather than forcing users to be responsible for their private keys, cloud wallets store them in “the cloud,” or another system that is often managed by a third party. Users can access them whenever they want to spend or move their cryptocurrency, but the rest of the time, they never need to worry about them.

The first cloud wallet was announced in 2021 by Huobi Wallet, which believes that traditional software wallets can be complicated and cumbersome, especially to crypto newcomers. Huobi felt that as decentralized finance (DeFi) continues to grow in popularity, a simpler solution was required — one that would also prevent the loss of assets when private keys are lost.

What is a software wallet?

A software wallet is essentially an application that allows users to manage their cryptocurrencies and NFTs. Most also allow the values of those assets to be monitored in real time, as well as provide quick and easy access to decentralized applications (DApps). Some even have built-in trading, allowing cryptos to be bought and sold without having to move them elsewhere first.

It’s important to note that wallets, no matter what kind you use, don’t actually hold your crypto coins and tokens — they always remain on the blockchain. Instead, wallets simply hold the private keys that prove ownership of your assets and allow them to be spent and moved around. With a software wallet, these keys are managed by the user.

Software wallets are the most common type of cryptocurrency wallet in use today. They are typically installed on smartphones and tablets, though some are also compatible with computers and web browsers, and they provide access to your digital assets at any time — so long as you have an internet connection.

Cloud wallet vs. software wallet

The big difference between cloud wallets and software wallets is how they handle private keys. As we mentioned above, software wallets pass that responsibility onto the user. They hold your private keys for you, but it’s up to you to keep them safe. This means ensuring your device itself is secure, and that you do not share your wallet’s seed phrase or login details with anyone.

If you decide you want to use a different wallet later, you need to take your private keys with you or you will lose access to your assets. This can be a problem if the device your wallet is installed on is lost or stolen. If you cannot access the same wallet on another device, or you did not backup its access credentials or private keys, your cryptocurrencies cannot be recovered.

Cloud wallets work a little differently. Although they may seem very similar on the surface, they take control of your private keys for you by holding them in the cloud. When you need access to your keys to use your cryptocurrency, they are there and waiting. When you don’t, there’s no need to worry about them. If you lose your device, your private keys don’t go with it.

This may seem like a big advantage, especially if you’re new to cryptocurrency and you don’t want to have to worry about private keys. But it should be noted that cloud wallets are still very much in their infancy, and they currently have a lot of downsides and limitations that users should be aware of — especially when compared to traditional software wallets.

Cloud wallet disadvantages

The biggest downside to cloud wallets is that, because users do not control their private keys, it’s much more difficult to switch to a different wallet later. If you decide that you want the greater flexibility offered by a more traditional decentralized wallet, or your cloud wallet provider shuts down, your private keys may be stuck in the cloud, so you cannot use your assets.

It’s also unclear how exactly private keys are managed and stored by cloud wallet providers. We know they are held in the cloud somewhere, but the details are very murky. With that being the case, it’s difficult to trust that cloud-based private keys won’t be susceptible to breaches at some point. After all, how often do cloud-based services suffer data leaks and hacks?

Some cloud wallets are also incompatible with lots of DApps. For instance, the one offered by Huobi Wallet only allows access to “select” DApps and decentralized finance (DeFi) services. Each one has to be vetted and approved before it can be used — which does offer some security benefits — but if the one you want to use hasn’t been through that yet, you’re stuck.

Again, it should be noted that cloud wallets are still a very new concept, so these limitations may not apply to all or future options. As things stand, however, a more traditional software wallet is usually a better option unless the cloud wallet experience is exactly what you’re looking for.

Examples of cloud wallets

Aside from Huobi Wallet’s offering, there aren’t really any other true cloud wallets available right now. Some people may occasionally refer to other types of software wallets as cloud wallets, presumably because they are always connected to the blockchain and ready to use at any time, but almost all decentralized options leave it up to the user to handle their private keys.

Examples of software wallets

When it comes to more traditional software wallets, there are lots of excellent options to choose from. Whether you want a centralized offering that includes the option to buy and sell cryptocurrencies and NFTs, or a decentralized offering that lets you access DApps and other services, you should be able to find a wallet that fits your requirements.

Binance, Coinbase, Gemini, Crypto.com, and Kraken are all examples of major centralized exchanges that provide users with a wallet as standard. Coinbase also offers a decentralized wallet app, while MetaMask and Trust Wallet are other popular alternatives. However, if you want the best-decentralized wallet on the market today, check out MetaOne from AAG.

MetaOne wallet is one of the first decentralized options to do away with cumbersome and flawed seed phrases in favor of a much more familiar login option that uses an email address and password. It combines that with a polished and easy-to-use interface, and cutting-edge security features designed to protect you from malicious websites and DApps.

Visit the MetaOne website to learn more and to find links to MetaOne for Android and iOS.

References

• Huobi wallet launches cloud wallet to make accessing defi projects easier
• Cryptomathic invents cloud wallet
• MetaOne Wallet