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In the world of cryptocurrency, a "wallet" is simply a collection of private keys for account IDs (or "addresses").

In some cryptocurrencies, a new address is generated for every transaction. The private keys for all of these addresses are stored in a "wallet", which is usually an encrypted data file. The wallet may be kept online, on your computer, or stored on a flash drive or hard drive that is not connected to the Internet.

In Nxt, this concept is handled a little differently, by default.

1 Brainwallet

By default, Nxt uses what is known as a "brainwallet". This term means that all account IDs are stored on the distributed blockchain -- a little bit like how many services let you store data "in the cloud".

Most Nxt users generate only one account ID, and are instructed to create a very secure passphrase to use as the "key" to that account ID. If you lose this passphrase, you will lose access to all of the coins held at that account ID.

The advantage of this setup is that Nxt tokens are stored on the network, and not on your computer. This has two important benefits:

  1. You can access your account and your funds from any client, software, or interface that supports Nxt. Just enter your passphrase, and your funds are available.
  2. If you live in a jurisdiction where it is illegal to hold cryptocurrencies, you can access your account without leaving any data on your local computer that can be "seized". This means that you are not breaking the law, because you are never actually holding any coins.

Disadvantages of this arrangement are:

  1. it is different than the "wallet"-type setup used by most other cyrptocurrencies, which can lead to confusion. People often refer to Nxt software as the "Nxt wallet", which is not accurate.
  2. being able to access your funds anywhere means you may also be tempted to enter your passphrase in places where it may be captured or observed. This can also happen on a "wallet.dat" system, but the risk is somewhat lower because not all "wallet.dat" files are compatible with all kinds of wallet software -- in Nxt, the same passphrase will always open the same account, no matter which software client is being used.

All Nxt clients support the use of the brainwallet.

2 wallet.dat

Many other cryptocurrencies support the use of a file called "wallet.dat". This is a single, encrypted file that contains any number of "keys" for any number of account IDs. Client software creates and manages this file for you. Once you "unlock" your wallet with a password that only you know, you can see and use all of the addresses or account numbers contained in that wallet. If the wallet file is damaged or lost, or if you forget the password for the wallet file, you will lose access to all of the addresses in the wallet, and all of the coins contained in those addresses.

Advantages of this system are:

  1. the ability to store your "wallet.dat" file offline, on a flash drive, disconnected hard drive, or in some cases a simple piece of paper. If hackers can't get to your wallet.dat file, they can't steal it!
  2. being able to store multiple Nxt account IDs
  3. it works in the same model used by many other cryptocurrencies, making it easy for people familiar with other cryptocurrencies to work with Nxt.

Disadvantages are:

  1. an inability to access your account ID in any location where your "wallet.dat" file is not available
  2. different software developers may use completely different methods to encrypt your "wallet.dat" file, making it incompatible with any other software packages.

Currently, only the Offspring client supports the creation and storage of a wallet file.