Many people are curious about what a cold wallet in the blockchain world actually is. Can a cold wallet, which emphasizes high security, be hacked?
Ko Wen-je, the chairman of the Taiwan People’s Party, was recently involved in the Jinghua City case and was detained and banned from meeting by the Taipei District Court. 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? Can a cold wallet, which emphasizes high security, be hacked?
What is a wallet?
What exactly is a wallet? This is a common question among newcomers to the blockchain world.
Unlike bank accounts and transportation cards like EasyCard, cryptocurrency wallets do not actually store virtual assets (cryptocurrencies, NFTs) within 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 virtual assets need to be used, the “private key” is required to prove ownership of the wallet. Only the person who possesses the private key for that address can use the wallet. Therefore, the private key must never be disclosed to others, as virtual assets can be stolen. The private key is designed based on cryptography and generates a unique 256-bit random number. There are no two sets of duplicate 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 and technically cannot be reverse-calculated to obtain the private key. Only the person who possesses the private key for that address can use the wallet.
A wallet is similar to a Google, Facebook, or LINE account 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 a wallet, one can explore everywhere and interact with the blockchain network like a key.
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 their wallets.
The concept of a wallet can also be compared to a bank account. Without a wallet, it is impossible to send and receive cryptocurrencies. In other words, the first step to owning cryptocurrency is to have a wallet, which is not held by any bank or financial institution.
Wallets are mainly classified into hot wallets and cold wallets based on “online or offline storage”. They come in the form of hardware wallets, mobile applications, browser plugins, etc., making cryptocurrency payments or transactions as convenient as online card payments.
Hot Wallet: High convenience in transactions
A hot wallet, also known as an online wallet, includes exchange wallets, browser plugins, apps, etc. When there is a withdrawal request, funds can be easily withdrawn with a simple approval process. However, because it operates in an online state, 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 depositing encrypted assets with a trading institution. Although it provides high transaction convenience, if problems arise with the exchange, the encrypted assets may not be retrievable.
The recent bankruptcy case of the exchange FTX illustrates the risk of misappropriation of encrypted assets stored in centralized exchanges. Even if the wallet belongs to the user, the user cannot freely withdraw the encrypted assets when the bankruptcy is established. This is why when there is news of risks related to exchanges, investors rush to withdraw their funds.
In addition, there is a well-known browser plugin called MetaMask, which allows connection and interaction with various decentralized applications (dApps). The biggest difference and advantage of browser plugins compared to exchange wallets is that users themselves manage the private keys, which are stored in the plugin software. Although the control of the wallet is higher, the generation and use of private keys in such hot wallets are connected to the network, making them susceptible to network hacker attacks and not 100% secure.
The operation of “app wallets” is similar to that of browser plugins. The difference is that apps are installed on mobile phones, while browser plugins are software extensions for computers. Depending on the user’s situation, different software can be used for wallet operations.
Cold Wallet: High security
Compared 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 USB devices 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 you lose or damage your cold wallet, you can still recover the assets inside as long as you remember the private key and mnemonic phrase of the wallet. This is because the assets are not stored in the cold wallet itself but are read from the blockchain by connecting the cold wallet to a computer.
Compared to free hot wallets, common cold wallet brands in 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, appearance, operational interface, supported currency types, and service content. They come in the form of credit cards, USB devices, hard drives, etc., supporting different numbers of currency types, ranging from 1,000+ to 10,000+, and even including NFTs. They also provide functions such as transactions, staking, and DeFi.
Purchasing and using a cold wallet have certain thresholds. It is necessary to place an order through the official link and confirm that the packaging is intact upon arrival to avoid installing hacker 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 created when opening an account on an exchange, it is advisable to install the most well-known browser plugin, MetaMask, to use various decentralized applications (dApps).
In addition, there is the official Binance-supported decentralized wallet Trust Wallet, 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 do not need to be traded temporarily. The choice of cold wallet can be based on factors such as budget, number of currency types owned, and usage habits. In terms of convenience, the cold wallet CoolWallet issued by a Taiwanese blockchain company supports a Chinese interface and can be directly connected via Bluetooth on a mobile phone. It also 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 number of bitcoins held by exchanges to less than 12% of the total. For example, in December, Binance lost 90,000 bitcoins within 7 days, and Coinbase had 200,000 bitcoins withdrawn within 4 days in November.
Although many exchanges offer interest rewards to attract users to store their cryptocurrencies on the exchange, in situations where market risks are high and the security of the exchange cannot be determined, investors prefer to safeguard their assets. Storing assets in cold wallets is a safer reserve method to protect oneself from unknown market risks.
Proofreading Editor: Gao Jingyuan