As the name suggests, a paper wallet consists of a piece of paper on which the public and private keys of a cryptocurrency address are physically printed out. These keys are often displayed as QR codes, along with their respective alphanumeric strings.
After a paper wallet is generated, its owner can receive cryptocurrency transactions by sharing their public address with others. Transactions can be made by either manually inputting the keys or by scanning the QR codes with a smartphone.
Some paper wallet providers give users the option to generate new addresses and keys while being offline. To do so, users are required to download the wallet generator as an HTML file and execute it while being disconnected from the Internet.
Due to the possibility of generating addresses offline, paper wallets are often considered as an alternative for cold storage. Their security is also related to the fact that they present a completely analog format, meaning they are immune to hacker invasion or other attacks that can only be performed in the digital environment.
Paper wallets were very popular between 2011 and 2016, but their use is now being discouraged due to the many risks associated with it. Owing to the physical fragility of paper, they are subject to being damaged or destroyed fairly easily. It is also important to consider the security of the devices used to generate them, i.e., a clean computer and a printer that does not store file data after printing.
Another danger of using paper wallets comes from the misconception that funds can be sent multiple times from the same address. For example, imagine that Alice has 10 BTC on a paper wallet, and she wants to send 3 BTC to Bob while keeping the remaining 7 BTC. If Alice sends 3 BTC to Bob from her paper wallet, the remaining 7 BTC will be, by default, transferred to another address (known as the change address). This means that her paper wallet won’t have any balance left and she won’t be able to access those 7 BTC, as they were transferred to a change address that is not in her possession.
Alice could manually set the outputs of her transaction to include both Bob’s address and another address that she controls (to send the change back to her) - but this would require some technical knowledge. If Alice fails to create a change output for herself, the remaining 7 BTC could be taken by the miner that validates that transaction’s block. Therefore, she would be better off sending the entire balance (10 BTC) to a cryptocurrency wallet software, such as Trust Wallet, and only then send 3 BTC to Bob.