We often hear terms such as hot wallets, cold wallets, and hardware wallets. So, what are the differences between them? According to different criteria, we can classify digital wallets differently. Below are some common methods of classifying digital wallets.
Based on whether the private key is controlled by the user, digital wallets can be classified as centralized wallets and decentralized wallets. In the world of digital currency, the private key represents ownership and control of assets. If the private key is uploaded to a service provider's server, it is called a centralized wallet. In this case, the user does not control the private key, as it is held by the service provider. For example, when trading on a centralized platform, digital assets are stored in the platform's digital wallet, rather than being controlled by the user's private key.
On the other hand, if the private key used in a digital wallet is controlled by the user and not uploaded or stored by the service provider, then this type of digital wallet is called a decentralized digital wallet. Currently, many digital wallets are decentralized. Our digital assets can be stored on the platform for convenient trading, or in a decentralized digital wallet where the user manages the private key. In theory, decentralized digital wallets are more secure.
Based on whether the private key is connected to the network during storage, digital wallets can be classified as hot wallets and cold wallets. Platforms usually store most digital assets in cold wallets for security reasons, while a small amount of digital assets are stored in hot wallets for easy trading.
Why is it safer to store digital assets in a cold wallet? Because cold wallets are not connected to the internet, their security is greatly increased, while hot wallets are connected to the network, and theoretically, their security is not as strong as cold wallets.
Common types of cold wallets include paper wallets, brain wallets, hardware wallets, and offline mobile wallets. Any digital wallet that is not connected to the network can be collectively referred to as a cold wallet. A paper wallet is a common way to back up a private key by writing it on paper. A brain wallet usually means remembering the private key in one's mind, but this does not mean that only those with superhuman abilities can remember the long and irregular hash private key. In fact, people can remember the key through mnemonic phrases or use online brain wallet generators to create easy-to-remember "brain wallet passwords". Some people even hide their private keys in sentences they like, or in poems. A hardware wallet stores the private key of digital assets separately in a hardware device that is isolated from the internet. Hardware wallets use offline storage, and the device is controlled by the user.