What is a Cold Wallet?
What is the most secure way to protect your Cryptocurrency from hacks?
Cold wallets, a type of cryptocurrency wallet, provide the highest level of security for your digital assets by keeping them offline and away from potential threats.
A cold wallet, is a cryptocurrency wallet that remains entirely disconnected from the internet, personal computers, and does not grant permissions to smart contracts. In simpler terms, cold wallets serve as a form of offline storage, where private keys are physically stored. These physical storage devices can range from specialized hardware wallets to a basic piece of paper with your private key written on it.
The primary role of cold wallets is to act as a secure "vault" for your cryptocurrencies, operating independently of external influences.
Due to their isolated design, cold wallets are the preferred choice for safeguarding high-value cryptocurrency assets over extended periods.
Storing your crypto assets in a cold wallet ensures that your private keys, remain entirely offline and isolated from internet-connected devices. For example, Xellar employs a proprietary Secure Element Chip, a high-level security chip used in passports and security cards, to generate and store your private key. This chip fortifies your crypto assets against various physical and software threats by incorporating hacker-resistant countermeasures directly into the chip.
The true benefit of employing a cold wallet lies in its ability to separate the transaction approval process from the mobile device or computer. It's a sadly frequent occurrence to witness cryptocurrency theft from hot wallets like MetaMask, as the entire approval process resides on the device itself. Once a malicious actor gains access to the device, they gain complete control over your cryptocurrency holdings.
However, with a cold wallet like Xellar Card, a physical card is imperative to authorize transactions. This security measure effectively thwarts all potential long-range attacks and safeguards your wallet from any malicious intrusion.
Cold wallets come in various forms, each with unique characteristics regarding security, user-friendliness, and accessibility. Examples include
Paper Wallets: Paper wallets involve recording your private key or corresponding address on paper. Users can execute transactions by signing using their private key. While this method keeps keys offline, paper wallets are vulnerable to physical damage or loss, and recovering keys can be problematic.
Sound Wallets: Sound wallets are a distinctive form of cold wallet where private keys or seed phrases are stored on physical media such as CDs, flash drives, or vinyl records in the form of audio files. Although innovative, sound wallets are susceptible to physical damage. Additionally, they may require specialized software or devices for decoding private keys in case they are needed in the future.
Hardware Wallets: Hardware wallets generate and store private keys within a secure physical device. These devices often include hold your private key on the device or card and require a connection to a phone or computer to manage the transaction.
Xellar Cards are a good example of a Hardware Wallet as they enable the generation of numerous private keys for managing various blockchain accounts, all isolated from internet connections. This versatility allows you to safeguard assets from multiple blockchain networks, such as Ethereum and Bitcoin, using a single hardware wallet, streamlining wallet management.
When you wish to transfer assets from cold storage, hardware wallets provide a user-friendly experience. You retain full control over how you manage your accounts, permitting the separation of assets into distinct accounts for vaulting and interacting with smart contracts.
Although the terms "cold wallet" and "hardware wallet" are often used interchangeably, they differ primarily in how they interact with the internet and the Web3 ecosystem. A hardware wallet can interact with decentralized applications (dApps) or smart contracts, but when used as a cold wallet, it refrains from any interaction with smart contracts.
In summary, all hardware wallets are cold wallets in their initial state, but this changes when they become connected to a blockchain app. For a comprehensive understanding of this distinction, please refer to our detailed article on cold wallets vs. hardware wallets.
Beyond the distinctions between cold and hardware wallets, it's essential to grasp the difference between cold and hot crypto wallets. In essence, hot wallets and cold wallets vary significantly in how they store, access, and protect your private keys.
Hot wallets are designed to facilitate easy access and interaction with the cryptocurrency world by connecting to the internet and are often on the phone or computer via App. However, in doing so, they compromise some security measures. While hot wallets are convenient for quick transactions, they are also vulnerable to theft since they store private keys on the host device connected to the internet.
The Xellar App is a Hot Wallet until connected with a Xellar Card.
Conversely, cold wallets serve a different purpose. A cold wallet stores your private key entirely disconnected from the internet and does not interact with smart contracts. This is the opposite of what a hot wallet is designed for.
The concept of segregating your assets is a proactive measure to mitigate risks associated with smart contract interactions. This entails storing different amounts of cryptocurrencies in separate wallets, with the most valuable assets residing in a cold wallet. The most effective way to segregate your crypto assets is based on transaction risk levels and asset types.
Utilizing your Xellar Card for cold storage leverages Xellar’s multi-level security system. Xellar stores your private keys offline using an industry-grade secure element chip.
In addition to security against hacks, Xellar safeguards against unauthorized access, even if your device is lost or stolen. Xellar Card feature a personalized PIN, ensuring that only the owner can unlock the device.
With Xellar, you can manage your assets through a user-friendly interface, Xellar App. Xellar allows you to set up multiple accounts on the same device, with each account operating independently. This flexibility means that you have full control over how you manage your assets, aligning with the principles of self-custody.
Find out more about the Xellar Card here.