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✍Aenco Academy✍ #5: Cold v.s. Hot Wallet?

✒ SUMMARY OF THIS WEEK’S TOPIC

Cybersecurity is a growingly conspicuous concern amongst modern netizens. For global users involving in the sphere of digital assets, stiffening cryptographic security is of prime importance in particular to those who are investors and holders of crypto assets. This week, at Aenco Academy #5, we will explain what is a Crypto ❆Cold/ ♨Hot Wallet and why there is a growing demand in the market.

Understanding the concept of Crypto Wallet

✒ ALLEGORY: THAT WALLET IN YOUR POCKET

When you receive your salary, the amount say 100 USD, you could literally put all the cash inside your physical wallet, or you deposit it to your personal saving account for safe keeping. In most cases, you do not need all 100 USD everyday since your daily spending is on average 1 USD per day. And if you always put all the amount of money inside your wallet, there are thefts who could find ways to steal from you and the reprecussion could be losing it all at once. Therefore, to safeguard the money, we put most portion of the 100 USD, say 70 USD, inside a saving account in the bank, whereas the remaining 20–30 USD in the wallet for daily spending.

This allegory is largely applicable to the storing of digital assets. People need something to ‘store’ ditigal assets safely. You can imagine the Hot Wallet similar to your physical wallet where you put your money inside, yet still suspetible to potential thefting since it is connected to the internet. To ensure higher security, some use Cold Wallet: storing major amount of money offline.

But what makes the Crypto Wallet special is that they don’t actually ‘store’ the cryptocurrencies or assets. Instead, it generates relevant addresses, public and private keys for users to undergo transaction within the blockchain. It is important to note that the private key is like a password, and the private key should be kept to yourself and never reveal it to others.

What is Cold and Hot Wallet?

HOT WALLET ♨ ♨ ♨ ♨ ♨

In simple word, a Hot Wallet is a wallet connected to the internet. Examples like exchange wallet, web wallet, desktop wallet and any software wallet maintained by third parties. They are to some extent more popular amongst digital assets holders because they can easily set up the wallet online. People also use Hot Wallet to store more diversed cryptocurrencies for instant online trading with traders/exchange platforms on the net. Downside is higher risk of losing the asset due to its intertwining relationship with the net, where potential cyber malwares and online hackers can easily exploit the hot wallet. A confusion people often have is seeing desktop or mobile wallet as Cold Wallet since they believed by downloading it to the devices, it is no longer connected to the internet: they are still considered Hot Wallet because it is downloaded from online source and hackers could still access the locally-saved private keys when the keys are not further encrypted, properly backed up or exported. An example will be adding a password to the file that contains the private keys.

COLD WALLET ❆ ❆ ❆ ❆ ❆

A Cold Wallet, or more commonly known as cold storage, is relatively more secured because it stores the private keys in an offline environment. One common choice of cold wallet is paper wallet, where the private and public keys will be printed on a phyical paper, therefore it is not accessible by the hackers. Although this is said to be the most convenient cold wallet, if you lose the piece of papar, you will no longer gain access to the stored assets. And if a somebody steals or gets hold of that piece of paper with the printed keys, they can gain control to your stored assets. Another more secured option will be hardware wallet, where the private keys are generated in an offline environment. It could be a USB, or a electronic device, where in some cases require the owner to push a button everytime it generates a key or engage in mobilize the stored assets (therefore not controlled by hackers). It could help ensure higher degree of security, but it could also be troublesome to users since it takes more time and effort to access the stored funds in cold wallets, and the price of cold wallets are not as cheap as most hot wallets.

Why need both Hot Wallet and Cold Wallet?

✒ COMPLEMENTARY: THE COLD & HOT IS LIKE THE YING & YANG

Cold and hot wallets are dedicated to different functions, and we argue that they are mutually complementary to each other. It is common for digital assets holders to use both the Cold and Hot wallet so that they can mitigate risks. We mentioned there are merits and defacts of both Wallets and therefore, there is no one single answer as to whether we should use either one of them. The typical practice will be storing the majority of your digital assets in the cold wallet (like your salary in a bank saving account) and the remaining, approximately 2% of your total holdings, will be placed in the Hot Wallet (your wallet in the pocket) for instant transactions online.

About ✍Aenco Academy✍:

We are the Education Team (ETs) from Aenco Solutions, eager to promulgate knowledge concerning Fintech, Blockchain technology and innovative ideas. At ✍Aenco Academy✍, ETs put up free weekly article for world-wide knowledge exchange. Short, easy and suitable for all categories of readers.

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