Types of cold wallets

There are several different types of cold wallets, each with its own set of features and benefits. Some of the most popular include hardware wallets, software wallets, and paper wallets.

Hardware wallet

A hardware wallet is a physical device that stores your cryptocurrency assets offline. Such wallets create private and public keys using a random number generator, providing an extra layer of security. However, there are some risks to consider when using a hardware wallet. For example, if the device gets damaged, your assets could be lost. It is also important to choose a trusted and trustworthy company to provide you with a hardware wallet to avoid any security risks. Buying a device off hand or from unauthorized dealers, there is a risk that its internal software may have been modified to steal the new owner’s cryptocurrency.

Hardware wallets are the closest thing to truly “cold” storage. They are compact, easy to use, and highly secure. Most hardware wallets can store multiple cryptocurrencies, making them the best choice for those who want to manage a diverse portfolio of assets.

Software wallet

Software wallets are digital wallets that can be installed on a computer or mobile device. Desktop wallets are stored on your computer and usually use a wallet.dat file to store private keys. Mobile wallets, on the other hand, use QR codes or NFC technology to conduct transactions. Software wallets are convenient, but they don’t provide 100% security. Mobile wallets, in particular, are vulnerable to hacking because they operate over the internet. In addition, to keep your assets safe, you should back up your seed phrase and private keys, and encrypt your mobile wallet.

Software wallets are a good choice for those who want to manage their cryptocurrency assets quickly and easily. They are especially convenient for those who need to make transactions on the go. However, it is important to be aware of the security risks associated with software wallets and take steps to mitigate those risks.

Paper wallet

A paper wallet is a type of cold wallet that is a physical piece of paper that has your private and public keys written on it, usually in the form of a QR code. This type of wallet is very safe if you keep it in a safe and secure place. However, if the paper wallet is lost or damaged, your assets will be lost. It is also important to keep in mind that paper wallets are not as convenient as digital wallets, as you will have to manually enter your private keys every time you want to make a transaction.

Thick and Thin Wallets

Another important distinction between the different types of cold wallets is the difference between so-called “thick” and “thin” wallets.

Thick wallets

Thick wallets, also known as full nodes, are a type of cryptocurrency wallet that stores the entire blockchain of a particular cryptocurrency on a hard disk. This means that they download and store all data about all transactions on a computer or other device. Some of the benefits of using a fat wallet include:

• Enhanced security. By loading the entire blockchain, thick wallets provide a higher level of security compared to thin wallets.
• Increased privacy. Since all information is stored locally, thick wallets provide greater privacy for users.
• Full control. Fat wallets give users full control over cryptocurrency transactions, as they themselves can confirm transactions and generate new ones.

However, there are some disadvantages to using a fat wallet, including:

• Large storage capacity. A thick wallet requires a lot of free disk space to store a large amount of data, making it less convenient for users with limited resources.
• Slower data processing. Verification of transactions and synchronization with the network is slower compared to thin wallets.

Thin wallets

Thin wallets, also known as light nodes, are a lighter version of thick wallets. They do not store the entire blockchain, but load only the necessary information required for transactions. Thin wallets have several advantages over thick wallets, including:

• Faster transaction processing. Thin wallets can process transactions faster because they load only the necessary information.
• Less storage space. Thin wallets require less space to store information.

However, the disadvantage of thin wallets is that they are less secure than thick wallets because they rely on a third-party server to confirm transactions.

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What is cryptocurrency in simple words

Cryptocurrency is any kind of currency in digital or virtual form, which means that it does not exist in the physical world. All digital money “lives” only in the networked space. It is important to note that they are not backed by anything. Anyone can mine (“mine”) cryptocurrency, but you should know that there are restrictions on mining cryptocurrency, so the value of cryptocurrency often increases over time.

As everyone knows, things are different in the world of fiat, i.e. conventional currencies. World central banks can issue new money into circulation (“printing” money), which can lead to inflation. The rates of world currencies can be regulated by the states that issue this money. In the field of cryptocurrencies, everything is decentralized and there is no single center of control. The speed of payments and the amount of transfer fees for cryptocurrencies is generally less than in the market of conventional currencies.

The plus side of the cryptocurrency sphere, which attracts new and new users to it, can be called anonymity, it is difficult to find out who participated in the transaction. At the same time, the disadvantages are the same – ultra-high volatility and the impossibility of wide circulation of cryptocurrencies in public life due to the scarcity of infrastructure.

How to use cryptocurrency

Before you start using cryptocurrency, you need to think about where to store it. Cryptocurrency wallets are used to store cryptocurrencies. A cryptocurrency wallet is a mobile application, a special program or a separate standalone device created for all transactions with tokens.

There are five types of wallets in the digital world: software wallets, online wallets, hardware wallets, mobile wallets and paper wallets. Let’s talk briefly about each of these types.

Software wallets store money on your computer’s hard drive. Their advantage is a fairly high level of security.

The minus is that storage requires quite a lot of space: the size of the information can be higher from 150 gigabytes just for one cryptocurrency.

Online wallets store your tokens on third-party servers (in the cloud). You can use your tokens from any device. The price for mobility is low security. If hacked, all tokens are lost.

Mobile wallet applications installed on phones and tablets have the same advantages and disadvantages. If the phone falls into the hands of fraudsters, you have to say goodbye to cryptocurrency. Thus, there is no simple answer to the question of how to use cryptocurrency through a crypto wallet.

A much more reliable hardware wallet is a separate standalone device. It is quite difficult to hack it. The obvious disadvantage is that the device must be constantly with you and remember all access codespin-codes. If you forget or lose them, you will not be able to use your cryptocurrency with the help of such a hardware wallet.

A paper wallet is just a private and public key generated with the help of a special site. You can write it down in a paper notebook or print it out, or better yet, write it down in several notebooks at once, because the loss of the key leads to the loss of the cryptocurrency.

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Suppose we have a group of 10 people who want to be able to exchange currency outside of the banking system. Let’s consider sequentially the actions performed by the participants in the system, where the blockchain will be represented by ordinary sheets of paper:

1. Empty box

Each of the participants has a box in which he will add sheets with information about all transactions made in the system.

2. Transaction moment

Each participant sits with a piece of paper and a pen and is ready to record all the transactions that will be made.

At some point, participant №2 wants to send 100 dolars to participant №9.

To make the transaction, participant №2 announces to everyone, “I want to give 100 dolars to №9, so make a note of it on your sheet of paper.”

Everyone then checks to see if participant №2 has a sufficient balance to make the transaction. If so, everyone makes a note of the transaction on their sheets.

The transaction is then considered complete.

3. Execution of transactions

Over time, other participants also have a need to perform exchange transactions. Participants continue to announce and record each of the transactions that have taken place. In our example, 10 transactions can be recorded on one sheet, after which the completed sheet must be put aside in a box and a new one taken.

4. Adding a sheet to the box

The fact of placing a sheet in the box means that all participants agree with the validity of all transactions and that the sheet cannot be changed in the future. This is what ensures the honesty of all transactions between participants who do not trust each other.

The last stage is a general case of the Byzantine Generals problem. In the conditions of interaction of remote participants, some of which may be malicious, it is necessary to find a winning strategy for all. The process of solving this problem can be viewed through the prism of adversarial models.

Adversarial models

Adversarial models refer to the situation of finding among the participants a malicious group that would like to exploit the vulnerability of double spending (debiting two accounts and then canceling the honest transaction). The following categories of models can be distinguished:

• Threshold models. Stable network operation requires the number of attackers to be less than some value (half or one-third of all participants).
• Computational threshold models. Developed by Satoshi Nakamoto, a model for using the computing power of participants to select the correct block. In relation to blockchain, such systems are based on the Proof-of-Work principle. These include Bitcoin, Ethereum and others.
• Fractional Threshold Model. An amalgamation of the previous ideas, where computer computations are replaced by some object of value. For example, the cryptocurrency itself serves as an object of collateral, which the participant uses to confirm the validity of the blockchain. The next generation of blockchain uses this method called Proof-of-Stake. A prominent representative of such a model is NEO.

The chosen adversarial blockchain model determines the method of getting rewarded for creating a new block. We have already discussed that a blockchain is a distributed database consisting of blocks. The difficulty of adding new blocks is determined by the adversarial model:

• The proof-of-work model utilizes the processing power of the devices of the network participants. The group of devices of the first to create a new block is rewarded in the form of cryptocurrency (this is mining).
• The proof-of-ownership model involves using users’ assets as collateral to prove the integrity of all transactions in the new block. All participants are rewarded in an amount proportional to the pledged assets.

Broadly speaking, a key feature of blockchain is the elimination of the human factor – the responsibility for the validity of transactions falls on the shoulders of math and computers, which are much more reliable.

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What is the importance of blockchain technology?

Traditional database technologies pose a number of challenges in accounting for financial transactions. Consider the example of a real estate sale. After the money is transferred, the title of the property passes to the buyer. Both the buyer and seller can record the monetary transactions themselves, but neither party can be trusted. Upon receiving the money, the seller can easily claim that he did not receive it, and the buyer can claim that the money was sent even though it was not.

To avoid potential legal problems, a trusted third party must monitor and validate transactions. The presence of this central authority not only complicates the transaction, but also creates a single point of vulnerability. Breaches in the central database will affect both parties.

Blockchain anticipates such problems by creating a decentralized, tamper-proof system to record transactions. In the case of a real estate transaction, blockchain creates a single registry for the buyer and seller. All transactions must be approved by both parties and automatically updated in their registries in real time. Any discrepancy in the transaction history will be reflected in the entire registry. These properties of blockchain technology have made it popular in various sectors. For example, they were used in the creation of the digital currency Bitcoin.

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