Finally, we’ll explore how the future of wallets might look completely different. Ready? Let’s dive in!
If you only have a few minutes, here are the core differences between hot wallets and cold wallets:
In the Ethereum ecosystem, a hot wallet describes a digital wallet that is connected to the internet, making it easy for you to approve transactions quickly.
Examples include Metamask and Coinbase Wallet (for a comparison of the best web3 wallets, click here).
These wallets allow you to interact with Ethereum and other EVM-compatible blockchains, providing you with the flexibility to transact anytime and anywhere.
On a software level, hot wallets work similar to cold wallets. They restore their private key with a seed phrase and have the same functionality.
But hot wallets are the less secure option between hot wallets and cold wallets. That’s because they’re always connected to the internet. This creates a few potential security risks:
Exchanges store your coins for you. While this makes them easy to access with an email & password login, exchanges also create risks:
Hot wallets give you more control over your private keys and your crypto. Exchanges can be high-value targets for hackers, and there have been instances of large-scale security breaches.
Exchanges are convenient, but have downsides. If you simulate transactions, having a non-custodial wallet keeps you safer.
Hot wallets work by storing your private keys on a device that's connected to the internet. When you make a transaction, these wallets use your keys to sign it, which then gets broadcasted to the network to be added to the blockchain.
On Ethereum, every hot wallet is compatible with all EVM blockchains. This includes layer 2 solutions like Optimism and Polygon as well as separate blockchains like the Polkadot network and Avalanche.
To use a hot wallet, you first install it on your device. Once installed, you create a new wallet, which generates your private keys via a seed phrase. Remember to back up these keys offline and never share them with anyone.
You can then receive or send Ether, ERC-20 tokens or NFTs by connecting to web3 dApps like Uniswap.
What should you keep in a hot wallet?
A hot wallet is for assets you need to have available quickly and are willing to lose. This includes funds for gas fees, to buy NFTs or to use for DeFi apps like liquid staking.
If you acquire an NFT or a large amount of cryptocurrencies you can’t afford to lose, we recommend “vaulting” it in a cold wallet.
There are many hot wallets, but a few popular ones include:
A cold wallet, also called a hardware wallet, stores your private keys offline on a physical device. This means they’re never in an iCloud backup or any other centralized server.
That way, no hacker can get access to them (as long as you don’t compromise your seed phrase or give the wrong token approvals). Popular examples include Ledger and Trezor, which are often called the best cold wallets.
That doesn’t mean you can’t use your cold wallet on web3 apps like lending protocols: Metamask and other software wallet providers support Ledger.
While this is possible, it’s not always recommended: As soon as you use your cold wallet online, it stops being untouchable. If you insist on using your cold wallet online, make sure you revoke token approvals afterwards.
If you do, cold wallets are the equivalent of a high-security vault for your crypto assets—they're disconnected from the online world, providing robust protection against online threats.
Cold wallets store your private keys offline on a physical device. When you want to make a transaction, you need to connect this device to an online interface, sign the transaction with the private keys, approve the transaction on your physical device and then disconnect the device once the transaction is complete.
Cold wallets are generally safer. You'll make fewer transactions, thus limiting exposure to potential threats. However, security is still paramount—you remain vulnerable if you compromise your seed phrase or give incorrect token approvals.
To get a cold wallet, you need to purchase a hardware wallet. You can choose the best hardware wallet by reading online reviews, but make sure it can store every cryptocurrency you’d like to use.
While most of the popular providers are fine, you should never buy second-hand hardware wallets or from unofficial vendors.
There have been reports that new, but compromised hardware wallets were sold on eBay, which then allowed the vendors to drain their victim’s assets. Only buy on the brand’s official website.
After setting it up and securing your backup seed phrase, you can transfer assets to the addresses provided by the device.
What should you store in a cold wallet?
Cold wallets are safer than hot wallets, but also make it harder to move assets. We recommend using a cold wallet for assets you want to safeguard (like expensive NFTs or large amounts of tokens) and don’t plan on moving in the near future.
The future of wallets in the Ethereum ecosystem might see a transformation with account abstraction.
Account abstraction gives software wallets the functionality of smart contract wallets, which enhances both their features and security. On the other hand, cold wallets could use the autonomous elements of smart contracts to ease transaction processes without compromising their offline security.
There are many ways both hot and cold wallets could change with account abstraction. But when it comes to account management and staying safe in crypto, here are a few transformations we might see:
In conclusion, hot and cold wallets serve unique roles in the crypto landscape. Hot wallets offer convenient, immediate access to funds, but are susceptible to online security threats. Cold wallets, while less handy for frequent transactions, provide a secure offline storage option for substantial assets. Ultimately, a balance of both may be the most secure approach for many users. With the advent of account abstraction, we can expect transformations in wallet functionality, offering an even more secure and seamless crypto experience in the future.
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