Public key and private key
How do we manage crypto keys?
Crypto assets are a record in the blockchain system, “a data in the network”. A crypto wallet or wallet is a device or program that allows us to interact with these crypto assets, sending or receiving them. These wallets do not store crypto assets, they allow us to manage public and private keys (Fernando Branciforte, Blockchain legal aspects, crypto assets, smart contracts and new technologies).
There are two types of wallets: hot wallets and cold wallets.
Hot Wallets
Hot wallets need an internet connection to work, with software, web browser extensions, mobile, web or desktop applications.
They are easier to use, have a lower learning curve, are practical to operate frequently and are the most accessible, being in many cases free.
Among the risks we can mention that they are not as secure as cold wallets, they are more susceptible to hacks, computer attacks and in the case of exchange wallets, in these cases we do not have the private keys or the custody of the crypto assets .
Hot wallets are classified into:
Web wallet: they work as a web browser extension or from the browser directly.
Desktop wallets: they are downloaded to the computer and used as a desktop application.
Mobile wallets: are applications to download and use from a smartphone.
Exchange wallets: exchanges are cryptocurrency exchange platforms, they allow us to buy, sell, invest crypto assets and exchange them for fiat currency (legal tender money). Some exchanges offer a wallet directly when you register, with a username and password instead of the private key. As Branciforte points out, these are custodian exchanges that have possession of the private keys and custody of our crypto assets.
Cold Wallets
Cold wallets are not connected to the internet.
They are classified in:
hardware wallets: They are physical devices similar to a pen drive.
Paper wallets: they are printed “wallets” that contain our keys. The key is loaded into an app or software at the time of operation.
Cold wallets are more secure than hot wallets, since not being connected to the internet, they are less susceptible to computer attacks, hacks or technical failures. However, they have a higher learning curve, we must know how they work, how to use them and they may not be as practical as hot wallets.
As the popular expression “Not your keys, not your coins” says, it means that if you don’t have control over your private keys, then you don’t really own your cryptocurrencies, or at the very least, you don’t really have control of them.
This is especially important when using exchange wallets, since in these cases, as noted, the exchange has possession of our private keys and custody of our crypto assets.
The exchange could go bankrupt, suspend operations, disable access to crypto assets, or be subject to hacks. These are real cases that have happened. If any of these situations happen, one can always take legal action against the exchange, but it is a corrective measure and not a preventive one.
Both hot wallets and cold wallets have their pros and cons. The choice depends on each one. The most important thing is to keep in mind and evaluate the risks and benefits of each type of wallet, the use that we are going to give it and the time that we dedicate to learning how it works.
CEO of Lex Rock. Lawyer, entrepreneur and promoter.
Source: Ambito
