Hot wallets: advantages and disadvantages

INTRODUCTION

With the development of blockchain technologies, the need for secure and convenient ways to manage digital assets arises. One of the key tools for interacting with crypto is cryptocurrency wallets. Among them, hot wallets hold a special place.

WHAT IS A HOT WALLET

A cryptocurrency wallet that is constantly connected to the network. It can be represented as a browser extension or a mobile application. These wallets store private keys within their own interface.

HOW HOT WALLETS WORK

Hot wallets store public and private keys in an online environment, allowing users to access their assets from any connected device. Public keys are used to receive coins, similar to an email address, while private keys are necessary to manage the contents of a blockchain address, similar to a password.

TYPES OF HOT WALLETS

Hot wallets are divided into custodial and non-custodial wallets:

• Custodial Wallets:

Private keys are controlled by a third party. An example of a custodian is any CEX exchange. Here, the user has access to the wallet after registering on the exchange but cannot interact directly with the blockchain address.

• Non-Custodial Wallets:

The user fully controls the private keys and directly manages their crypto assets. When setting up such wallets, a SEED phrase is generated for recovery access. Examples: MetaMask, Trustwallet.

!!! NOTE: Store the SEED phrase securely and do not share it with third parties.

ADVANTAGES OF HOT WALLETS

• Ease of Use:

Easy and quick access to your assets, making them ideal for daily transactions.

• Accessibility:

Wallets can be accessed from any device with an internet connection.

• Integration with Services:

You can easily connect to various services and platforms.

DISADVANTAGES OF HOT WALLETS

• Vulnerability to Cyber Attacks:

Constant connection to the network increases the risk of hacks and cyberattacks.

• Phishing Risk:

Users often fall victim to fraudulent schemes and phishing, especially when using unverified links and sources.

• Limited Security:

Hot wallets are less secure for storing large amounts.

HOW TO USE A HOT WALLET SAFELY

• Do Not Store Large Amounts:

Keep the majority of your assets in cold wallets. Hot wallets are suitable for trading small amounts and interacting with dApps.

• Diversify Assets:

Do not keep all assets in one wallet.

• Updates from Official Providers:

Download apps and updates only from official sources.

• SEED Phrase:

Store it in a safe place and do not share it with third parties.

• Vigilance with Links:

Avoid clicking on unfamiliar links and do not connect your wallets to unknown websites.

• Two-Factor Authentication (2FA):

Enable 2FA for extra protection and write down the generated code on paper after verifying it.

• Understanding Smart Contracts:

Familiarize yourself with their functions before use. Additionally, if you are using, for example, MetaMask, disconnect from all sites after use to avoid risks from hacking of a third-party resource.

CONCLUSION

Hot wallets offer convenience and accessibility for cryptocurrency users but require additional security measures to protect assets. Understanding their advantages and disadvantages will help you choose the right wallet for you and effectively manage your crypto assets.