Hot Wallet, Cold Wallet : The Different Types of Wallet
The world of cryptocurrencies is full of innovations and wallets (or wallets), these programs that allow you to manage your cryptocurrencies, are no exception to the rule. In fact, there are so many different portfolios on the market that it's hard to make a choice when just starting out as a user. Fortunately, it is possible to list the different types to find your way around a bit more.
In particular, we can separate all the portfolios into two distinct categories: hot wallets and cold wallets. What differentiates them is that a hot wallet will be directly connected to the Internet during its use while a cold wallet will not.
This property allows the cold wallet to offer maximum security by considerably reducing the attack surface for a hacker. This is why it is recommended to use a cold wallet to store large amounts of cryptocurrency.
Before going into more detail on what hot wallets and cold wallets look like, let's first look at what characterizes a wallet.
What is a Wallet?
Generally speaking, a wallet, sometimes also called a wallet, is a device or program whose function is to manage cryptocurrencies. It allows you to receive, send and of course keep them. The wallet is therefore the interface making the link between the real world and crypto-monetary protocols such as Bitcoin or Ethereum.
However, this rather widespread definition is not entirely correct and it can be described a little better. From a technical point of view, a wallet is a method of storing cryptocurrency coins, or more precisely the private keys that control these coins.
Wallets are therefore in reality key rings: it can be a sheet of paper on which the private keys are written, a computer file, or more generally the software or device that manages these keys. .
Thus, the main role of a wallet is to keep the private keys of a user. In this way, an account on a centralized exchange platform is not a wallet strictly speaking: these platforms keep the private keys of their users for security and ease of use.
It would therefore be more judicious to speak of crypto-banks, although their applications are mistakenly like wallets, which is the case of Coinbase or Uphold.
Hot wallets are solutions for hot storage of private keys, that is to say solutions that use devices directly connected to the Internet. This will in particular concern everything that is a software wallet.
By being exposed to the Internet on a regular basis, this type of wallet gives hackers a much larger attack surface than if the private keys were generated and kept offline. This is why it is recommended to avoid storing large sums with this type of solution, and to restrict yourself to small or medium sums depending on the wallet used.
The hot wallet category groups together different types of wallets: full nodes, lightweight wallets, browser extensions, and web wallets.
The full node, also called full client, is the first type of wallet that ever existed. As its name suggests, a full node performs all the tasks necessary for the health of the network: it downloads the entire blockchain, validates and relays unconfirmed transactions, and checks the validity of the blocks.
Due to its difficulty of use, this type of wallet is generally not used by ordinary people, but by actors involved in the field such as minors, large merchants, services on the web and advanced users. wishing to have full control over their funds.
Bitcoin Core is arguably the most well-known full node software. It is the benchmark implementation of Bitcoin (BTC) used by more than 95% of the nodes in the network. It derives directly from the original client and, for this reason, is sometimes still referred to as "Satoshi's client". But this dominance is not always the rule: Ethereum has a multitude of complete implementations, the most popular of which are Parity and Geth.
So-called "lightweight" wallets are nodes that do not download the blockchain and perform simplified transaction verification that requires minimal computing resources. They are often referred to as SPV wallets, with SPV standing for Simplified Payment Verification.
These wallets can be available on computer, tablet or mobile, but their operation remains largely the same from one device to another. On the computer, there are wallets like Electrum for Bitcoin or the Exodus multi-asset wallet. On mobile, we can mention BRD (formerly known as bread wallet) which also manages several cryptocurrencies.
The last category of hot wallets is that of web wallets. These are online interfaces for managing funds. Unlike exchange platforms, you keep control of your private keys when you use this type of service: these are managed by your browser and are never revealed to others.
Although security may vary from site to site, this type of portfolio suffers from some vulnerabilities. First, a web wallet generally does not verify transactions and is satisfied with the information provided by the servers of the site used. Second, these wallets are susceptible to phishing (or phishing) of the web page used.
Among the many web wallets on the internet, one can find Blockchain.com or coin.space which both handle bitcoin, ether and bitcoin cash. For Ethereum, there is also MyEtherWallet is a complete wallet for handling all the tokens on the platform.
Cold wallets are solutions for cold storage of private keys, ie out of any direct access to the Internet. This conservation has the merit of reducing the attack surface and therefore the risk of theft by computer hacking.
Cold storage is the ideal solution for securing crypto assets and is recommended for holding large sums of cryptocurrency. Exchange platforms, which are prime targets for hackers, systematically use this method to keep their users' funds.
Any device that is constantly offline can serve as a cold wallet, but two kinds of wallets seem to have some popularity: hardware wallets and paper wallets.
Hardware wallets are devices whose specificity is to generate and store private keys in isolation and to allow signing off-line transactions. It is today the safest solution to hold cryptocurrency.
In this category fall the wallets manufactured by the Ledger company, including the Ledger Nano S and the Ledger Nano X. There are also other equally secure hardware wallets such as the Trezor, the Safe-T by Archos or the KeepKey by Shapeshift. .
Paper wallets are the simplest wallets you can imagine: they consist of a private key and its corresponding address printed on a sheet of paper. Note that the secret information can also be a mnemonic phrase. For a paper wallet to truly represent cold storage, it must have been generated by a machine that has no contact with the Internet, such as an old computer that is no longer used.
Each type of wallet has its uses. Knowing all of these categories will allow you to determine which one is best for each of your needs.
Since you are solely responsible for your crypto-assets, it is advisable to play the card of caution, and to resort to multiple portfolios if necessary.