What is the difference between hot wallets and cold wallets?

What is a crypto wallet?

We use and come across wallets daily in our life. Wallets are nothing more than a medium for storing things. Similarly, in the world of web3, wallets are used for the same purpose. In the decentralized world, a crypto wallet is defined as a software or a physical device that is used to store the private keys and cryptocurrencies of a user. It also facilitates receiving and sending of cryptocurrency from one user to another.

But why do we need to store private keys? Private keys are like a “password” to your “mail address”. If the password is hacked, your personal mail and information get sacrificed. And similarly, if the “private key” get’s hacked, your cryptocurrencies get sacrificed.

Imagine you have to send a gift to your friend as a cryptocurrency. You know your friend’s name, but do you know their address? Probably yes - their physical address, but what about in web3? How will they receive the cryptocurrency that you will send? All these things are done via the crypto wallet.

Although crypto wallets are assumed to store cryptocurrencies, they don’t. They just hold the keys and the currencies are stored on the blockchain. The wallets make them accessible. The first crypto wallet was launched by 2009 when he first released the Bitcoin blockchain

Types of Crypto Wallets

What are hot wallets?

Hot wallets are those crypto wallets that are connected and accessed via the internet. Like every other wallet, they allow you to store the cryptocurrency and send & receive the same. The data(such as private key, and public key) in these wallets are stored over the cloud server which makes it accessible from any location and device. As these wallets are stored over the cloud and are accessed via the internet, they are most prone to hacks and thefts. 

Some examples of hot wallets include Metamask, Coinbase Wallet, etc.

What are cold wallets?

Hardware wallets are a kind of hardware-enabled device that store a user’s public and private keys offline. These are used as portable devices which increase security and are less prone to theft and attacks. While it is a common misconception, not all hardware wallets are cold wallets.

Cold wallets are a subset of hardware wallets. They are not connected to the interest and where the private key is stored offline in a hardware instrument or on a paper. In these wallets, transactions are signed offline and later updated in the chain. These are the safest options to store your private key as they have the minimum risk of hacking and theft. On the other hand, these wallets have the highest risk of being misplaced and losing the private key. 

Some commonly used crypto wallets -

1. Metamask (Hot Wallet)
2. Ledger Nano (Cold Wallet)
3. Coinbase Wallet (Hot Wallet)
4. Trezor Model T (Cold Wallet)
5. Trust Wallet (Hot Wallet)

Conclusion 

In the world of web2, we need to protect our sensitive information such as passwords, PINs, etc. Similarly in the world of web3, we need to protect our private keys to prevent our crypto assets from being sacrificed. And hence, crypto wallets are adapted and used to keep our assets protected in the decentralized world.