Cold Wallet – Trend or Mandate

Cold Wallet can be thought of the state where the addresses and keys are managed by a device or a thing that’s not connected to the internet. This type of wallet is not connected to any other device per se but stands separate and be used for the sake of digital asset storage and transaction purposes. Cold Wallets are the staple of secure storage of cryptocurrency with an industry reputation of being considered the impenetrable.

One may say, cold storage is basically a private key kept offline, and this could be on a USB, a paper note, or a hardware wallet. One can just write the private key on a piece of paper and store it offline. However, given the possibilities of losing the USB or the paper wallet and inability to create a backup copy, there is no means of restoring access to information pertaining to the digital asset. Then came the idea of storing the assets digitally on a computer, some developers call it as Air-Gapping.

Air-Gapping:

The concept of air-gapping in wallets can be thought of as a way by which users can store the private key on a wallet that does not have to connect to the internet or to any IOT device. Air-Gapping technique requires the availability to two devices (computers), one being connected to the internet and the other, placed offline. Creation and signing of the transaction will take place on an offline device and the transmission will take place on the online device.

Overview of how a typical cold wallet works:
We know cold wallet architecture does not depend on the internet to generate and encrypt the private keys. Armory discovered a simple and easy way of establishing the cold wallet using HTML/JavaScript code in six easy steps:

1. Transfer the address and transaction generator code via USB to the offline computer.
2. Create private keys and store them in a .pdf,.txt or in other file forms.
3. Create a TrueCrypt volume and if desired, a hidden volume.
4. Place the files containing the private keys into the TrueCrypt volume.
5. Transfer the TrueCrypt volume via USB to an online computer.
6. Store the TrueCrypt volume in many places such as Dropbox, Amazon Cloud, Google Drive, etc.

Famous cold storage devices:

• Trezor - Is the very first digital assets cold wallet renowned for being possibly the safest option. It is a highly compact sized wallet.
• Ledger Nano S – Ledger is popular alternative to Trezor, perhaps functionality wise both are same, but Ledger is cheaper.
• KeepKey – Heavier in weight compared to the above two wallet types. The wallet provides additional functions compared to Trezor and Ledger.

These wallets work in a similar way. You connect them to your computer whenever you need to access your digital asset and verify them. With the Trezor, for example, there is a PIN number verification.

Is it a trend or a necessity?

When dealing with digital assets stored in wallets, security remains the highest priority. Cold storage is the recommended way to store the bulk of your coins as a means of long-term secure storage strategy.

In fact, 92% of exchanges use cold-storage systems and on average 87% of funds are kept in cold storage. To make the cold storage wallet systems more robust and reliable, multi-signature architecture was introduced, now this feature is supported by 86% of large exchanges and 76% of small exchanges.

Looking at the industry trends, highest proportion of assets in cold storage as stated publicly by exchanges is described in the following graph.

The largest difference between small and large exchanges is observed regarding the use of special hardware dedicated to a single purpose (e.g., air-gapped device for cold storage of cryptocurrency funds), which are used by 91% of large exchanges compared to only 59% of small exchanges.

We can conclude that the year to come will have a greater adaption of cold storage as an active strategy to fight the hacks. We will get to see many exchanges incline towards cold wallets that are robust, rigid and lightweight. To decide if this is a trend or a mandate, we may say cold wallet, or the combination of cold wallet and others will be considered as an mandatory requirement for trade.

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