Crypto Wallets: Hot & Cold & How do they work?

On July 13th, Binance burned BNB token worth about $400 million. To the uninitiated, this might seem wasteful and expensive, but his was done primarily as a deflationary measure, to maintain the supply and stability of the token. Binance now has an Auto-Burn procedure, which is based upon smart contract execution based on trading numbers that quarter.

If you’re unaware of what ‘burning’ is, it’s when a certain amount of coins or tokens are removed from the circulation to keep the supply stable. This is to aid blockchain services, aiding blockchain development by keeping a constant, stable price.

With Binance, the procedure is really simple as well. BEP-20 tokens come with a built-in Burn function, which does basically what happens in all coin burn procedures.

First, the coins which are to be burned are transferred to a burn account…and that’s pretty much it.

However, ‘Burn’ accounts are special. They have no private keys. It’s not as if it’s just not visible on-chain like other accounts, they don’t have it, at all. This means that they’re built to accept crypto, never to give out crypto; meaning the coins sent to that public address are lost forever.

Private keys, however, are the most important thing when it comes to on-chain interaction. The beauty of cryptocurrency is its security with simplicity, and private keys are what you use to show ownership to the blockchain.

What are Crypto-Wallets?

Unlike physical wallets, crypto wallets don’t actually store your cryptocurrency. Your coin is always on the chain; distributed into bits and pieces in the form of ledger transactions, with a public address and a private key. Your public address is what’s visible to all the node-operators and it is what’s recorded in the ledger ‘blocks’.

Private Keys are what you use to show a chain that you own a public address.

Crypto-wallets essentially do two things. They assort and accumulate these bits and pieces and create an ‘account’ which is sum of these parts. Secondly, they store the private key. A crypto-wallet IS your private key.

Wallets add another layer of functionality, between the chain and the user, making it more accessible and secure; because with a wallet you have an additional layer of security with a password or a secret phrase; but not all kinds of wallets. Let me elaborate.

There are basically two kinds of crypto-wallets:

1.?????Cold Wallets

2.?????Hot Wallets

What are Cold Wallets?

Cold wallets are offline wallets. Real world, non-virtual things that you store private keys inside. It can be something as simple as a piece of paper that has private key written in it. They are mainly of two different kinds:

1.?????Paper Wallets: As the name suggests, this just a piece of paper empowered with a private key. Powerful stuff.

2.?????Hardware Wallets: These can include anything from a thumbdrive to a DVD to anything that can store information.

The idea is that ‘wallet’, that piece of paper provides you access to your electronic ‘cash’. Things like a thumb-drive wallet are included in this category.

There are several advantages to this. Anything on a paper cannot be hacked with anything on internet, which sounds like common sense but is actually a pretty huge advantage. Cold wallets are efficient, and secure; but also very indifferent. ?

There are multiple checks in place with hardware security checks in place, like a thumb drive with 2 Factor Authentication enabled, or has face-ID or hardware/IP address authentication. However, I would be lying if I told you that makes that thumb drive absolutely secure.

Anyone with the private key owns the associated account, the chain doesn’t differentiate, that’s sort of the point! Unfortunately, this means if you were to lose that paper or thumb drive or sticky-note or tissue paper that has this information. It’s lost. Finders keepers.

What are Hot Wallets?

Hot wallets are wallets that are more software based, more online. Think of such kind of wallets as a desktop/mobile application. It’s similar to a bank or brokerage account in a lot of ways.

With an online wallet, you can:

1.?????Manage Digital Assets, even ‘sign’ smart contracts.

2.?????Control your private keys; and protect them with an additional layer.

3.?????Send and Receive crypto.

4.?????Interact with usernames; instead of a hexadecimal public key compressed into a public address.

5.?????Browse dApps. This is so important given that a lot of blockchains are just virtual machines providing functionality for applications.

6.?????Shop at stores (that accept crypto, ofcourse!)

7.?????As a developer, you can also use this for NFT development services, or dApp development services.

8.?????Also, every time you deploy a smart contract deployment; and smart contract development services.

How do Crypto Wallets work?

At this point, you probably have some idea as to what public and private keys are. I am going to elaborate anyway.

When you ‘make an account’ on the blockchain, you get a cryptographic pair of keys. That is the pair of public and private keys. The former is like you e-mail ID, which other people except you can send mail to but not through. The latter is like the password for your email ID.

Conclusion

In a lot of ways, blockchain is like the steam powered. It’s the new thing this century that a bunch of people are going to use to make money, like every century. First, it was thermal energy and electricity, then there was the internet. Now, blockchain.

Wallets are like steam powered trains, one of the most basic primary functionality running on this new technology. Supporting the widespread adoption of this new technology. However, an end user doesn’t care how trains work. Or how the internet works. They just want the thing to vroom-vroom when they go clicky-click. That’s why wallets are important, they make hexadecimals into users.