Are you a crypto investor looking for a suitable #crypto wallet to store your coins? Then, in this essay, we’ll go through the different types of crypto wallets and their benefits and drawbacks.
The secret keys for accessing the blockchain distributed ledgers are kept in crypto wallets. These keys are used to validate transactions in the same way digital signatures are used. However, in the case of cryptocurrencies, their function extends much beyond that of a storage facility.
What is Crypto Wallet?
A crypto wallet is a software that allows you to keep track of your private keys. Secret keys are necessary to authenticate the ownership of digital assets when validating crypto transactions. The cryptocurrency ecosystem relies heavily on these keys.
The keys to a crypto wallet can be compared to the keys to a car. Keys are required to run the crypto wallet, just as they must drive a car.
How do these crypto wallets work?
Digital wallets, including crypto wallets, keep track of encrypted keys and store the blockchain address where a particular asset belongs. If the owner of the digital assets loses its address, they will lose control over their digital money and other assets as well.
There are two crypto wallets: hardware wallets and software wallets.
Hardware wallets: Hardware wallets are also termed cold storage as users can download and store transactions on hardware like smartphones or USB drives. Like Ledger and Trezor, vendors provide devices with preloaded software as cold storage wallets.
Dash QT and Exodus.io are the two popular cold storage wallets.
Cold wallets are divided into crypto-assist types of wallets. These wallets only handle the keys and signing of arbitrary data. This wallet is also called a hardware security module (HSMs).
Some wallets can handle the generation and signing of complete transactions entering the distributed ledger network.
Software wallets: They are also known as hot storage wallets. These wallets are accessible using an internet service like Coinbase. Large cryptocurrency exchanges like Coinbase provide the facility of online wallets for crypto holders.
The hot wallets are classified as paper wallet generators and can be printed or rendered as QR codes.
Which is a more Secure Wallet: A hot or Cold Wallet?
Cold storage wallet is regarded as a more secure wallet than a hot wallet as there is no internet connection. As per historical data, cryptocurrency attacks happen when a hacker targets an online wallet service.
Cyber attacks were made when the user inserted the secret keys into their wallet, especially while transferring the associated funds.
For example: In 2014, Mt. Gox, the Japanese online crypto exchange, was attacked, which resulted in the theft of 850000 Bitcoins worth more than $450 million.
Similarly, in 2018, Coincheck, a bitcoin exchange service, lost almost $1 billion in cryptocurrencies from its hot wallet service.
In most cases, attackers steal funds from cryptocurrency blockchain by taking over the customer’s accounts. Because of this reason, it is not advisable to store cryptocurrency balances in online wallets.
Industry experts advise keeping secret keys on a hardware wallet and having its hard copy on paper as a backup to safeguard the secret keys. Investors must understand why it is essential to keep keys secured, as most attacks are made by stealing the keys.
In the past, centralized wallet services were the lucrative targets for hackers, and they stole millions of dollars worth of cryptocurrency in a few minutes.
They have also targeted phone-based wallets by stealing SIM card identities.
Hackers have also used malware placed on crypto owners’ phones for the theft of cryptocurrency.
What happens if a crypto owner loses their secret keys?
If a crypto owner with a cold wallet does not back up the information in hard copy or secure it properly and loses the device, in that case, they lose their digital assets because of negligence.
In the case of cold storage, there are minimal methods to recover the lost private keys. These techniques are not very easy to use.
For example, Coinbase provides a recovery system that comprises 24 random words recovery phrases. The wallets are expected to record this phrase at the time of the creation of the wallet.
Whereas, in the case of hot storage, the added advantage of service provider support exists. If a crypto investor loses their access code, service providers have challenges-and questions for recovery.
As all the cryptocurrency transactions are executed on a trustless consensus mechanism, they do not recognize the person or transacting party. This system only trusts transactions adequately signed with a valid secret key.
Crypto wallets: Other uses beyond digital currency
Most crypto wallets are used for storing cryptocurrencies like Ripple, Bitcoin, Ethereum, or Litecoin.
But this software can also record keys to non-fungible and fungible digital tokens representing financial assets, goods, securities, and services.
For example, a token in a crypto wallet can represent any asset with a digital value attached to it. The token can represent the unique artwork, plane tickets, concert tickets, or goods in a supply chain.
In the future, based on the crypto wallets backed by blockchain technology, a new and trustless global economy might emerge.
These wallets might represent everything from professional histories, individual financial data, medical information, tax information, consumer preference, corporate employee data, digital signatures, etc.
In conclusion, hot and cold storage crypto wallets have their own pros and cons. Hot crypto wallets are gaining popularity because the service provider supports recovering the lost secret key. Investors are also inclined towards cold storage to safeguard themselves from hackers.
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