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Wallets, keys and recovery phrases: how your wallet works

Your wallet doesn't hold coins: it holds keys. Understanding that difference is half of staying safe in Web3.

By EnschileUpdated 4 min read

In 30 seconds

  • Your assets live on the blockchain; the wallet holds the key that lets you move them.
  • The private key signs; the address receives. The address comes from the key, never the other way around.
  • The recovery phrase (12 or 24 words) recreates your keys in any compatible wallet. Whoever has it has everything.
  • There is no “forgot password”. That's why the phrase is stored offline and never shared.
From your phrase to your addressThe recovery phrase generates the private key; the public key is computed from it, and the address from the public key. It only works one way.Recovery phrase12 or 24 wordson paper only, never onlineRecreates all your keys.Private keysecretsigns your transactionsWhoever has it has everything.Public keyderivedcomputed from the private keyUsed to verify your signatures.Addresspublic0x4c2a…9f1bThe one you share to get paid.One way only: nobody gets from your address back to your phrase.
Your wallet stores keys, not coins. The coins are recorded on the blockchain.

A wallet doesn't hold coins

When you say “I have 0.1 ETH in my wallet”, technically the blockchain records that the address 0x4c2a…9f1b controls 0.1 ETH. The wallet is the app or device that holds that address's key and signs the orders to move it.

That's why, if you delete the app, your assets don't disappear: they stay on the blockchain. What you need to use them again is the key, or the phrase that generates it.

Your wallet is a keyring, not a purse: the value is on the chain; the keyring holds the access.

Private key, public key and address

PieceWhat it isCan you share it?
Private keyA huge secret number. It's your signature: whoever knows it can move everything.Never
Public keyCalculated from the private key.Yes, though you'll rarely see it
AddressOn Ethereum, the last 20 bytes of the Keccak-256 hash of the public key, with “0x” in front: 42 characters.Yes: it's what you give to receive

The calculation only goes one way: the address comes from the private key, but the key can't be obtained from the address. That's why sharing your address is safe, and sharing your key is handing over everything.

What signing means

Every action —sending, approving, voting, signing in— is a message your wallet signs with the private key. The signature proves the order comes from the owner of the address without revealing the key. The network checks the signature and, if it matches, executes.

Here's the human weak spot: signing is powerful. An “approval” signature can authorize a contract to move your tokens forever. Before signing, read what you're authorizing, and if it says approve or setApprovalForAll on a site you don't know, stop. More in crypto scams and how to avoid them.

The recovery phrase

Almost every wallet generates your keys from a phrase of 12 or 24 words, taken from a standard list of 2,048 words. With that phrase, any compatible wallet recreates all your keys and addresses. It's your backup and, at the same time, your biggest risk.

  1. Write it down by hand, in order. On paper or stamped in metal, with each word in its exact position.
  2. Keep it offline. No photos, phone notes, emails, screenshots or cloud.
  3. Keep two copies in different places. A fire or a move shouldn't leave you locked out.
  4. Never type it into a website. No company, tech support or legitimate “verification” will ever ask you for it.
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Kinds of wallet

TypeWho holds the keysUpsideRisk
Exchange (custodial)The platformEasy, no phrase to look afterYou depend on the company: closures or freezes. See the Orionx case.
Browser or mobile (hot)YouConvenient for everyday useIt's online: malware and fake sites
Hardware (cold)You, on a deviceThe key never leaves the deviceLose the device and the phrase, and you lose everything
MultisigSeveral keys at onceNobody moves funds aloneMore steps to operate
Smart contract walletA contract with rulesSpending limits, recovery through trusted peopleDepends on the quality of the contract

The last two change the idea of “one key, one owner”. A multisig requires, for example, two out of three signatures to move funds: it's what treasuries and communities use. And account abstraction (ERC-4337) enables wallets that are contracts, with their own rules and recovery methods that don't depend on a single phrase.

A sensible setup

  • An everyday wallet with small amounts, to pay and use applications.
  • A vault, ideally hardware, for what matters. It almost never connects to sites.
  • An empty wallet to try new sites, claim things or connect to what you don't know.

Splitting things up works like keeping a debit card in your pocket and your savings in another account: if something goes wrong, the damage stays contained.

Does one wallet work across networks?

On Ethereum-compatible networks —layer 2s and others that run the EVM— the same address works on all of them. But sending an asset over the wrong network can leave it where you don't expect it, or where you can't get it back. Before sending, always check the source and destination networks.

Where to go next

A wallet is more than a place to keep assets: it's the starting point of your identity on the internet. The next block explains how your wallet, your ID and the blockchain relate to each other.

FAQ

What happens if I lose my phone?

If you have your recovery phrase, you install a wallet on another device, enter the phrase and get everything back. Without the phrase, whatever was in that wallet is lost.

Can I have several wallets?

Yes, and it's a good idea: one for everyday use with small amounts, another to keep what matters and an empty one to try new sites.

Is the address an exchange gives me my wallet?

No. It's a deposit address controlled by the platform. Some assets, such as wrapped ENS names, can be lost if they're sent there.

Sources

  1. ethereum.org · Ethereum accounts (accessed Sep 10, 2026)
  2. ethereum.org · Wallets (accessed Sep 10, 2026)
  3. ERC-4337 · Account abstraction (2021)