What Are Cold Wallets? How Do They Prevent Hacking?
- The biggest advantage of cold wallets is that they are offline
- They are USB Stick that stores the private key of the user
What are cold wallets?
Cold wallets are an important component of the blockchain ecosystem. They are specially built to protect users from vulnerabilities. Cold wallets can be used to store the user’s important credentials offline. To protect from being vulnerable to attacks by hackers. They are used for storing cryptocurrencies offline. Most of the crypto wallets are digital; which means they are stored online in the form of a code.
Exchange companies such as Coinbase and Kraken provide these hot wallets. Since these wallets are always online, they are always vulnerable to threats. Because if any hacker in any way figures out how to crack the security of the wallet, then they can easily access the private key.
They can further use this private key to transfer all the cryptocurrency to their wallet, and there will be very little that the affected person will be able to do. Hence security is a big concern in cryptocurrency. It is the responsibility of the user to ensure it.
How do these cold wallets work?
The private key is the most important thing for a user because it is the key with the help of which the user can access their crypto. The whole game is about storing this private key safely but storing this private key online is vulnerable. The cold wallet solves this issue by signing the transactions in an offline environment with the help of private keys. The main advantage is that it is offline; hence hackers will always face a tough time hacking this cold wallet.
Every time a transaction is processed, it is temporality stored in a cold wallet. Which then needs to be physically plugged into the device, and then the sender will approve the transaction with that device, and then the transaction will be processed. Hence, it adds a layer of security, and hackers cannot plugin that device until they do not have that device, physically. This is how cold wallets work and protects users from online fraud.
Disadvantages of cold wallets
Cold wallets provide a high level of security, but they still have some disadvantages. Here, users are required to choose the best for them as everyone has different requirements. Cold wallets are an extremely useful tool for some, while for others, it is not that helpful. This is because of the following disadvantages it offers:
Using cold wallets is a whole lot of process.
- First, the investor needs to connect the hardware to a computer that is internet enabled.
- The investor then chooses to receive the tokens by connecting them, and then the wallet will initiate the transaction.
- The sender then initiates the transfer of the tokens to the receiver’s wallet.
- The last stage is disconnecting the wallet from the computer so it stays protected.
Due to this, the use of a cold wallet is not suitable for traders because while trading, they need to process transactions very fastly, as any delay can cost them heavy losses. They are best suitable for long-term investors who do not use their wallets very often and have a huge amount of assets that should stay protected.
Another big disadvantage of cold wallets is that it is expensive. The price of these wallets depends on how many coins it can store. Even wallets with minimum storage are very expensive. This makes them hard to afford for small investors.
