Articles on: Wallet

Two kind of wallets: cold wallets and hot wallets...

To understand what we are talking about when we talk about wallets, visit this other article 👉 What is a wallet?

One of the most important points to cover when investing or starting to use cryptocurrencies is how they will be stored. Specifically, the question has to do with the security of the assets to be managed and is first resolved by defining the type of wallet that will be used. In this regard, a classification widely used to differentiate wallets by the security they offer is the one that separates cold wallets from hot wallets.
In both cases, we will be talking about wallets that allow you to store and manage cryptocurrencies. However, the differences are important and, depending on each profile, they will represent significant advantages or disadvantages to consider.

Cold wallets

Wallets that fall into this category stand out for being the safest storage options. In exchange for greater security, they may lose in practicality and functionality.
They are called cold wallets because they are not connected to the internet when generating the private keys of the account, making it impossible for them to be vulnerable to hacks, malware, or other forms of attack. This is their main feature and makes this type of wallet the choice for long-term hodlers.
As in any wallet, receiving cryptocurrencies is simple, only requiring the wallet's associated addresses. However, depending on the type of cold wallet in question, the connection to the internet —to the blockchain— will involve a certain manual process, which limits the practicality of these wallet formats for sending cryptocurrencies. In this same sense, these wallets may not be advisable if you are thinking of a wallet for operating with decentralized applications.
The most popular cold wallets are hardware wallets, electronic devices manufactured exclusively for this purpose, with companies like Ledger and Trezor at the forefront of this technology. There are also so-called paper wallets, which, as the name suggests, are paper backups of the private keys that correspond to a wallet. In both cases, taking care of the storage device of the private keys is essential. In the case of paper wallets, it is necessary that they are not even exposed to the view of third parties.

Among the options of cold wallets, hardware wallets are definitely the most valued and used. Even so, paper wallets and other alternatives such as XSeed try to offer simpler and more economical options.

Hot wallets

Hot wallets, on the other hand, are wallets that do not lose their internet connection. It is some software —desktop apps, browser extensions, mobile apps, web services— that offers quick and easy access to the cryptocurrencies it manages. Depending on the type of 'hot wallet' in question, the level of security and the precautionary measures that must be taken for handling cryptocurrencies through these options will vary.
In terms of security, hot wallets can be divided between options that leave custody of the private keys on the user's side —known as self-custodial, such as Defiant— and those that do not. Among these, the former are the ones that genuinely allow you to operate on the blockchain, access decentralized applications, and, ultimately, operate in DeFi. The latter —commonly referred to as custodial— show balances credited on them, without these balances necessarily corresponding to cryptocurrencies hosted at addresses on a blockchain, only representing an obligation on the part of these platforms to repay these amounts.
In no case should a hot wallet be the recommended option for managing significant amounts of funds, as cold wallets were specifically designed to provide greater security. It should also not be the first choice for a hodler who only accumulates cryptocurrencies and limits themselves to periodically acquiring new balances. However, it is only with a hot wallet like Defiant that it is possible to explore in depth the vast world of decentralized finance.

Updated on: 29/03/2023

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