How does a crypto wallet work, and what is the role of the private key and the seed phrase?
What the interviewer wants to hear
- A wallet manages keys; funds live on the chain, not in the wallet
- The private key signs transactions; the address is derived from the public key
- The seed phrase is a backup from which all keys are derived (HD wallets)
- Whoever has the key or phrase controls the funds, so it must never be shared
- Hardware wallets and smart contract wallets add safety
Model answer
A wallet does not actually hold coins. The balances live on the blockchain, and the wallet manages the keys that control them. The private key is a secret number used to sign transactions, and the public key and address are derived from it, so anyone can check a signature without knowing the secret. Most wallets are hierarchical deterministic: a 12 or 24 word seed phrase generates every private key, so the phrase is the real backup. Anyone who gets the phrase or a key can move all the funds, and there is no reset button, so it must never be typed into websites or shared with support. For larger amounts I recommend a hardware wallet, which signs inside a separate device, or a smart account with a multisig, spending limits and recovery options.
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