Many people are curious about what a cold wallet in the blockchain world actually is. Is it possible to crack a cold wallet that emphasizes high security?
Ko Wen-je, the chairman of the People First Party, was recently involved in the Jinghua City case and was ruled by the Taipei District Court to be detained and banned from seeing visitors. Recently, the media revealed that the prosecutor has seized Ko Wen-je’s cold wallet (Cold Wallet), which is currently being decrypted.
So what is a cold wallet exactly? Can a cold wallet, which emphasizes high security, be cracked?
What is a wallet??
What is a wallet (Wallet) exactly? This is a common question among many newcomers to the blockchain world.
Cryptocurrency wallets are different from bank accounts and EasyCards. They do not actually store virtual assets (cryptocurrencies, NFTs) inside 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 the implementation of various blockchain technologies.
Cryptocurrency wallets have three important elements: private keys, public keys, and addresses.
Private key:
When virtual assets need to be used, the “private key” must be used to prove ownership of the wallet. Only the person who has the private key for that address can use the wallet. Therefore, the private key must never be disclosed to others, as it would result in the theft of virtual assets. The private key is designed based on cryptography and generates a unique 256-bit random number. There are no duplicate private keys.
Public key:
It is a symbol used by miners on the blockchain to decrypt and recognize 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 calculated through the private key and cannot be reverse-engineered from the address itself. Only the person who has the private key for that address can use the wallet.
A wallet is similar to Google, Facebook, and LINE accounts used to log in to various online services in the internet world. Some people describe a wallet as a passport in the blockchain world, representing a person’s identity in the virtual world. With a wallet, one can explore everywhere and it is a key to interact with the blockchain network.
The ownership and management rights of a cryptocurrency wallet belong to the wallet owner and are not controlled by any company or organization. Users can send and receive cryptocurrency assets such as Bitcoin, Ethereum, and even NFTs through the wallet. It is also worth noting that cryptocurrency ownership requires owning a wallet first and is not held by any bank or financial institution.
Wallets are mainly categorized into hot wallets and cold wallets based on “online or offline storage.” They come in forms such as hardware wallets, mobile applications, and browser plugins, making the act of paying or using cryptocurrencies as convenient as online card payments.
Hot wallet: High transaction convenience
Hot wallets, also known as online wallets, include exchange wallets, browser plugins, apps, etc. With a withdrawal request, funds can be easily withdrawn through a simple authorization process. However, due to the online connection, there is an increased risk of being hacked and having funds stolen.
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 cryptocurrency assets to the exchange institution. Although it offers high transaction convenience, if the exchange encounters problems, the cryptocurrency assets may become irretrievable.
The recent bankruptcy case of the FTX exchange illustrates the risk of misappropriation of cryptocurrency assets stored in centralized exchanges. When the bankruptcy is established, even though the wallet belongs to the user, they cannot freely withdraw the cryptocurrency assets inside. That is why when there is news of risks involving exchanges, investors tend to withdraw their funds.
In addition, there is a well-known browser plugin called MetaMask, which allows users to connect and interact with various decentralized applications (dApps). The biggest difference and advantage of browser plugins compared to exchange wallets is that the private keys are self-managed and stored within the plugin software, giving users control over their own wallets. Although these hot wallets have a high degree of control, the generation and use of private keys in such wallets are connected to the internet, making them susceptible to hacking attacks to a certain extent and not completely secure.
“Browsing plugins” include the well-known MetaMask, where once installed, it can be connected and interact with various decentralized applications (dApps).
The operation of “App wallets” is similar to “browsing plugins,” but the difference is that apps are installed on mobile phones, while browsing plugins are software extensions for computers. Depending on the user’s situation, different software can be used for wallet operations.
Cold wallet: High security
In contrast to the dangers that hot wallets may pose to the loss of cryptocurrency assets, cold wallets store private keys in physical forms such as hard drives or USBs, and they are stored offline. When there is a need to deposit or withdraw cryptocurrency, they can be connected to a computer, 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, 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 the computer to read data on the blockchain.
Compared to free hot wallets, commonly seen cold wallet brands on the market include Ledger, Trezor, and Coolwallet. They are priced at around $100 to $250, depending on different brands and models, with varying security specifications, appearances, operation interfaces, supported currencies, and services. They come in the form of credit cards, USBs, hard drives, etc., supporting anywhere from 1000+ to 10,000+ different currencies, including NFTs, and providing functions such as transactions, staking, and DeFi.
The purchase and use of cold wallets have certain thresholds. It is essential to place orders through the original manufacturer’s link and confirm the packaging integrity upon receipt to avoid the installation of hacker software by malicious individuals.
How to choose a wallet?
Regardless of the purpose of holding cryptocurrencies, it is recommended to have a “hot wallet” for convenient transactions. In addition to the wallets created when opening an account on an exchange, it is suggested to install the most well-known browser plugin, MetaMask, to use various decentralized applications (dApps).
Furthermore, there is the Trust Wallet, officially supported by Binance, which has gained 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 do not need to be traded temporarily. The selection can be based on factors such as budget, the 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 mobile phones. Its card-like appearance is also lightweight and easy to carry.
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 saw 90,000 bitcoins disappear within seven days, and Coinbase had 200,000 bitcoins withdrawn within four days in November.
Despite many exchanges offering interest rewards to attract users to store their cryptocurrencies on the exchange, in situations where market risks are high and the security of exchanges cannot be determined, investors tend to prefer to safeguard their assets. Storing assets in cold wallets is a safer reserve method to protect oneself from unknown market risks.