Many people are curious about what a cold wallet is in the world of blockchain. Can a cold wallet, which emphasizes high security, be hacked?
Recently, the chairman of the People First Party, Ko Wen-je, became involved in the Jinghua City case and was detained and prohibited from seeing visitors by the Taipei District Court. Earlier, it was reported by the media that the prosecutor has seized a cold wallet under Ko Wen-je’s name, which is currently being decrypted.
What exactly is a cold wallet? Can a cold wallet, which emphasizes high security, be hacked?
What is a wallet??
What is a wallet (Wallet)? This is a common question among newcomers to the blockchain world.
Unlike bank accounts and EasyCards, cryptocurrency wallets do not actually store virtual assets (cryptocurrencies, NFTs) in the wallet. Instead, they are a digital medium for storing, sending, and receiving virtual assets. They are a critical part of the cryptographic infrastructure that enables various blockchain technologies to be implemented.
Cryptocurrency wallets have three important elements: private keys, public keys, and addresses.
Private Key:
When using virtual assets, you must use a “private key” to prove that you are the owner of the wallet. Only the person who owns the private key for that address can use the wallet. Therefore, the private key must never be disclosed to others, otherwise, the virtual assets may be stolen. The private key is designed based on cryptography and generates a unique 256-bit random number. There are no two identical private keys.
Public Key:
It is a symbol used by miners on the blockchain to decrypt and identify wallets.
Address:
It represents a specific “location” on the blockchain and can be used to send and receive virtual assets. The public address can be shared with everyone to receive assets. The address is a unique string calculated through the private key. Technically, the private key cannot be reversed from the address. Only the person who owns the private key for that address can use the wallet.
A wallet is similar to Google, Facebook, or LINE accounts used to log in to various services in the online world. Some people describe a wallet as a passport in the blockchain world, representing a person’s identity in the virtual world. With it, you can explore everywhere and it is a key to interact with the blockchain network.
The use and management rights of a cryptocurrency wallet belong to the owner of the wallet and are not controlled by any company or organization. Users can use the wallet to send and receive cryptocurrency assets such as Bitcoin, Ethereum, and even NFTs.
The concept of a wallet can also be compared to a bank account. Without a wallet, you cannot send or receive cryptocurrencies. In other words, the first step to owning cryptocurrency is to have a wallet, which is not kept by any bank or financial institution.
The types of wallets are mainly categorized based on “online or offline storage” as hot wallets and cold wallets. They come in the form of hardware wallets, mobile applications, browser plugins, etc., making the act of paying or using cryptocurrencies as convenient as online credit card transactions.
Hot Wallet: High Convenience for Transactions
A hot wallet, also known as an online wallet, includes wallets provided by exchanges, browser plugins, apps, etc. With a withdrawal request, you can easily withdraw funds through a simple approval process. However, because they are connected online, there is an increased risk of being hacked.
Among them, the hot wallets of “centralized exchanges” belong to users, but the control is not independent of the users. Mechanically, it is equivalent to entrusting the custody of the encrypted assets to the exchange. Although it offers high transaction convenience, if the exchange encounters problems, the encrypted assets may not be recoverable.
The recent bankruptcy case of the FTX exchange illustrates the risk of misappropriation of encrypted assets stored in centralized exchanges. When the bankruptcy fact is established, even though the wallet is owned by the user, the user cannot freely withdraw the encrypted assets inside it. That’s why when there is news of risks in exchanges, investors tend to withdraw their assets.
In addition, there is a well-known browser plugin called MetaMask, which allows users to connect and interact with various decentralized applications (dApps). The main difference and advantage of browser plugins compared to exchange wallets is that users keep their private keys and store them in the plugin software, giving users control over their own wallets. Although the control of the wallet is higher, the generation and use of private keys in these hot wallets are connected to the internet, making them vulnerable to network hacker attacks and not 100% secure.
“App wallets” operate in the same way as browser plugins, but they are applications installed on mobile phones, while browser plugins are add-on software for computers. Depending on the user’s situation, different software can be used for wallet operations.
Cold Wallet: High Security
Compared to the risk of losing encrypted assets with hot wallets, cold wallets store private keys in physical forms such as hard drives or USBs and use offline storage. They are only connected to computers when there is a need to deposit or withdraw cryptocurrencies, reducing the possibility of hackers stealing private keys.
Even if your cold wallet is lost or damaged, as long as you remember the private key and mnemonic phrase of the wallet, you can retrieve the assets inside the cold wallet. This is because the assets are not stored in the cold wallet itself, but are accessed by connecting the cold wallet to a computer to read data on the blockchain.
Compared to free hot wallets, common brands of cold wallets on the market include Ledger, Trezor, and Coolwallet. They are priced at around $100 to $250, depending on the brand and model, with different security specifications, appearances, operating interfaces, supported currencies, and services. They come in the form of credit cards, USBs, hard drives, and support various numbers of currencies ranging from 1000+ to 10,000+, including NFTs. They also provide functions such as transactions, staking, and DeFi.
Purchasing and using a cold wallet have certain thresholds, so it is necessary to place orders from the original manufacturer’s link and confirm that the packaging is intact upon delivery to avoid installation of malicious software by malicious individuals.
How to Choose a Wallet?
Regardless of the purpose of holding cryptocurrency, it is recommended to have a “hot wallet” for convenient transactions. In addition to the wallet established when opening an account on an exchange, it is recommended to install the most well-known browser plugin, MetaMask, to use various decentralized applications (dApps).
In addition, there is Trust Wallet, an officially supported decentralized wallet by Binance, which has attracted a large number of users with its clean interface and simple operation process.
At the same time, to increase asset security, it is also recommended to use a “cold wallet” to store cryptocurrencies that are not currently needed for transactions. The selection can be based on factors such as budget, number of currencies owned, and usage habits. In terms of convenience, the cold wallet CoolWallet issued by a Taiwanese blockchain company not only supports a Chinese interface but can also be directly connected via Bluetooth on a mobile phone. It has a card-like appearance and is lightweight and portable.
According to Glassnode data, after the closure of the FTX exchange, approximately 450,000 Bitcoins were transferred from exchange hot wallets to cold wallets in 2022, reducing the percentage of Bitcoin held by exchanges to less than 12% of the total Bitcoin supply. For example, in December, Binance experienced a disappearance of 90,000 Bitcoins within 7 days, and Coinbase had 200,000 Bitcoins withdrawn within 4 days in November.
Despite many exchanges offering interest rewards to attract users to store cryptocurrency on their platforms, in situations where market risks are high and the security of exchanges cannot be determined, investors prefer to manage their assets themselves. Storing assets in cold wallets is a safer way to protect oneself from unknown market risks.
Proofreading Editor: Gao Jingyuan
