We see the question “Where do digital wallets store money” come up a lot on Quora. So we decided to write this blog for you to explain where a digital wallet stores the cryptocurrency that is in it. And explain to you how blockchain storage works. To keep it simple we will focus on the Bitcoin blockchain only and explain where Bitcoin wallets store the Bitcoins for you.
Does Your Wallet hold the coins inside?
Simple answer, no it does not. Coins on any blockchain are not physical and don’t exist in one single place. This is because the coins do not really exist. You are probably very confused right now and are wondering what, how, and why?! Well, this is because the blockchain doesn’t consist of coins. But of a giant notebook with all the numbers of who owns what in it.
So to break that down into easier-to-understand parts. On a blockchain like Bitcoin. Transactions are recorded but not coin locations. This means that when you send 1 Bitcoin to your friendly neighbor Josh. The blockchain will not record that, that exact Bitcoin is now owned by Josh. But instead, it records that Josh has the right to spend 1 Bitcoin on someone else. This way coins are never really located anywhere or directly owned by anyone. The only thing that exists on the blockchain is a record of who has the right to spend what.
UTXO’s
This right to spend any amount of Bitcoin is what people in the crypto space usually revert to as Unspent transaction Output. Or in short UTXO’s. These UTXO’s can be then mushed together or broken apart for future transactions. Changing them from a 1 Bitcoin UTXO into UTXO’s of 0.5 BTC. Or from if combined with another 1 BTC UTXO into a 2 BTC UTXO.
The blockchain thus only records these rights to spend these “unspent transaction outputs”. Because of this mechanism, there are not really any coins on the blockchain but rather an account of who has the right to which amount.
Thanks for reading!
We hope this blog answered your question about where do digital wallets store money? But in case you still have some questions regarding wallets or UTXO’s. You can ask us in one of our help groups on Facebook or Telegram. Because we are happy to help as much as we can! If you have any other questions you would like us to answer in a blog? Feel free to let us know!
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