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I try to understand how a wallet actually works.

I know there are lots of resources around the internet, but I still can't find simple and concise answers for basic questions about wallets and private keys.

  • How does a Ledger Nano S work? Is it simply a wallet?

  • Is a wallet simply a folder/directory containing a number (1 or more) of private keys, each able to generate a public address?

    I imagine an entire wallet as a simple text file with a number of lines, each containing a private key (plus some functionality to see the number of coins sent to the public addresses associated with the private keys).

  • What ensures that a private key, generated in a wallet, is compatible with, for instance, the Bitcoin blockchain?

    According to my understanding, a private key is simply an encrypted integer value. Shouldn't this encrypted integer value be registered in the Bitcoin blockchain, ensuring it's valid and all other wallets are aware of the existence of this new private key?

  • Can I choose my own private key? If I have a favourite sequence of numbers, is it possible to encrypt these numbers and use the encrypted value as my private key, enabling me to have a private key without writing it down anywhere (I know I sound paranoid :-D)

  • If I, theoretically, don't intend to spend my Bitcoins, wouldn't it be more efficient to simply write down my private key on a piece of paper and never use a wallet until I actually intend to spend the coins?

  • For my hardware wallet, I am asked to fill out a recovery sheet. How can I recover my funds using my recovery sheet in case I lose my hardware wallet? I'm uncertain how the recovery sheet is linked to the private keys stored in my hardware wallet?

    If I can actually create multiple private keys in the hardware wallet, I can't image how the recovery sheet can be linked to the private keys stored on the wallet.

  • How can I see the balance of a wallet? Is it just the number of coins sent to the public address subtracted the number of coins sent from the public address (do you actually say that coins are sent FROM a public address or does public addresses only exist for the purpose of receiving)?

    If that's the case, could I simply dig down my hardware wallet in the ground in my garden, and still keep track of the balance using the public addresses associated with the private keys stored on the hardware wallet?

  • Is there any differences between the terms public key and public address? Is the blockchain technology almost similar to PGP encryption software?

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    This question is too broad in my oppinion. Can you separate this in several questions and post each separately?
    – croraf
    Nov 27, 2017 at 22:52
  • you will need to read a bit about wallets in bitcoin space :-) Here are two links: bitcoin.org/en/developer-guide#wallets and certainly the book "Mastering Bitcoin" from Andreas. It is also online available: unglueit-files.s3.amazonaws.com/ebf/…, chapter 4, "Keys, Addresses, Wallets". This forum is more of a Q&A, and requires simple, short questions which can be answered, hence the request to restructure your question. When you have read the book, you may answer the question yourself in the below section. Nov 28, 2017 at 13:25

1 Answer 1

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A wallet is anything that contains a collection of "nodes" - addresses, maybe pubkeys if watch-only, privkeys are needed for spending. Addresses in the public blockchain are just numbers derived from public keys, accessible for all clients to read or send to. But only those knowing the privkey for that node can spend its coins.

There are hundreds of different interpretations of "wallet". In olden days yes, just a list of random nodes could be called a wallet.

With BIP32, HD wallets are derived from one seed, could be a tree with millions of nodes used, what I call a wallet-account, all tied together from one BIP32 root key, master extended private key or xprv.

Type-0 keys are too easy to screw up, and only relate to one address, better to use BIP39 Seed Recovery Phrases, including an additional passphrase. If it is secure, then too hard to memorize, and brains are fragile.

The SRP derives the master xprv, which then can generate all the other keys and addresses in the tree. Derivation paths and gap limits are relevant terms to google.

Seeds and privkeys really should be generated from random entropy, definitely do not choose them with your brain, or they are likely to be too insecure. Proven fact, thousands of lost fortunes.

The job of a HWW like Ledger is to keep the privkeys secret, off the insecure phone or computer, away from the hot wallet-client, but easily accessible to sign spend transactions.

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