Money and fools – sooner or later parted – Thomas Tusser.
What is cold storage?
Cold storage is an offline wallet provided to store bitcoins. With cold storage, digital wallet hosted on a platform that is not connected to the internet, thus protecting the wallet from unauthorized access, network hacking, and other vulnerabilities to which systems connected to the internet are vulnerable.
Bitcoin and Altcoin Cold Storage Overview
When checking savings or a credit card account with a traditional bank has been compromised, the bank may be able to return the lost or stolen funds to the account holder. However, if your account or crypto wallet has been compromised and your bitcoins are stolen, the owner will not be able to get his or her funds back. Therefore, there is a need for a safe and secure storage medium for bitcoin and altcoins.
A bitcoin wallet that stores the private keys of the bitcoin owner. The private key provided to any bitcoin user is a unique alphanumeric string required to access the user’s address. The address is the unique user ID required to make a transaction and receive bitcoins from the sender. Two people making a transaction with bitcoin, where one is the seller and the other is the buyer, will have to share their addresses with each other to complete the transaction.
The buyer of the good or service sends the required amount of bitcoins to the merchant’s shared address as payment, and the blockchain verifies the validity of the transaction and confirms that the buyer or sender actually has those funds to to send. Once the payment has been sent to the address, the merchant or recipient can only access the funds through his private key. It is therefore imperative that private keys are kept safe because if stolen, bitcoin or altcoin users can be unlocked and accessed from the address without authorization.
Private keys stored on wallets connected to the internet are vulnerable to network-based theft. These wallets are called hot wallets. With a hot wallet, all the functions required to complete a transaction are performed from a single online device. The wallet generates and stores private keys; digitally sign the transaction with the private key; and broadcast the signed transaction to the network. The problem is that once signed transactions go live, an attacker gathering network data can become secret to the private key used to sign the transaction.
Cold storage solves this problem by signing transactions with private keys in an offline environment. Any transaction made online is temporarily transferred to an offline wallet stored on a device such as a USB, CD, hard drive, paper, or offline computer, and then digitally signed before being transmitted to online network. Since the private key does not come into contact with an online connected server during the signing process, even if an online hacker goes through the transaction, they will not be able to access the private key used for that key.
The most basic form of cold storage is a paper wallet. A paper wallet is simply a document with public and private keys written on it. The document is printed from an online bitcoin paper wallet tool using an offline printer. Paper wallets or documents often have a QR code embedded on them that can be easily scanned and signed to make a transaction. The limitation of this medium is that if the paper is lost, unreadable or destroyed, the user will never be able to access his address where his funds are.
Another form of cold storage is a hardware wallet that uses an offline device or a smart card to generate an offline private key. The Ledger USB Wallet is an example of a hardware wallet that uses smart cards to secure private keys. Device looks and functions like USB, and chrome-based computers and applications are required to store private keys offline. Like paper wallets, it is essential to store this USB device and smart card in a safe place, as any damage or loss could terminate the user’s access to bitcoins. Two other popular hardware wallets include TREZOR and KeepKey.
Finally, users looking for a cold storage option can also opt for an offline software wallet, which is quite similar to a hardware wallet but is a more complicated process for less technical users. Offline software wallets divide wallets into two accessible platforms – an offline wallet containing the private key and an online wallet with the public key stored. The online wallet generates new unsigned transactions and sends the user’s address to the receiver or sender at the other end of the transaction. The unsigned transaction is moved to an offline wallet and signed with the private key. The signed transaction is then transferred back to the online wallet to broadcast it to the network. Since an offline wallet is never connected to the internet, its stored private keys remain secure. Electrum and Armory are often cited as the best offline software wallets in cryptoeconomics.
Cryptocurrency users should ensure that the wallet they choose is compatible with the currencies they trade or trade, as not all wallets support all cryptocurrencies.
According to Tapchibitcoin
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