Centralized wallets have already taken over our entire lives, but they are not related to blockchain, at least not now.
Currently, in the world of blockchain, centralized wallets are mainly used for exchanges and asset management wallets. Let's take exchanges as an example. If you want to become a user of an exchange, you first need to create a personal account in the exchange.
The process of creating a personal account is the same as the registration process we are familiar with. You can register using your phone number/email/username. However, most exchanges require KYC, so you also need to provide various identity documents and personal photos to the platform.
After completing the registration, the system will allocate addresses for different currencies to you. But the question is, does this address belong to you? To determine whether an address belongs to you, you just need to check whether the private key corresponding to this address is managed only by you. However, there is no process of backing up the private key during the registration of a centralized wallet, so this address does not belong to you but to the platform.
Now, you can transfer coins to this address. Assuming you transfer 3 coins to this address, what happens next?
The platform will automatically transfer these 3 coins to its fund pool and record this transfer in your personal account. The control of this fund pool is in the hands of the platform.
Since you lose actual control of your assets after transferring them to this address, instead relying on the platform's custody, your asset security depends only on the platform's technical capabilities and conscience.
What is a decentralized wallet?
A decentralized wallet is the infrastructure of the blockchain world. It was born with Bitcoin, and without it, you cannot interact with the blockchain. So, what exactly is a decentralized wallet?
For convenience, we will refer to imToken as an example of a decentralized wallet.
According to Gavin Wood, Ethereum expert and founder of Polkadot, in his book "Mastering Ethereum," a wallet is a system that stores and manages private keys. Based on this explanation, imToken is more like a keychain than a wallet.
Does that make it easier to understand? In imToken, you don't create an account, you create a wallet, and the process of creating a wallet is a different experience.
You don't need to register with a phone number or email, and even setting a username and password is not the most important thing. The most important thing is to back up the "private key/mnemonic phrase" generated by the wallet.
Once the wallet is created, your "private key/mnemonic phrase" is stored locally on your phone in an encrypted form. It will not be uploaded to any server in any form, but only stored in the local storage space of your phone.
In the process of using imToken, all the asset data you see is obtained by imToken from the blockchain and displayed in front of you. When you need to make a transfer, you also need to use your private key to sign and confirm through imToken.
In summary, the private key represents your ownership and control of digital assets. With the private key, no one can touch your assets. The wallet is the place where private keys are stored, meaning that the wallet is the tool for exercising asset rights. This is the working principle of a decentralized wallet like imToken.
Therefore, ultimately, the most important thing for a decentralized wallet is to protect the security of the private key.
centralized wallets are where assets are stored, while decentralized wallets are where private keys are stored.
These completely different properties lead to completely different product forms.
It is said that you should not put all your eggs in one basket, except for centralized exchanges, decentralized wallets like imToken would be the best choice for managing your assets.