What is a cold wallet and how to achieve that?

What is a cold wallet?

Cold wallet is an idiom used for storing cryptocurrency private keys. To understand this idiom better it is first needed to understand the functionality of wallets in cryptocurrency.

Crytpo wallets are fundamentally different with physical wallets that we use. Physical wallets are a mean of storage for money while crypto-wallets store access keys to manage funds; more or less similar to bank atm access cards. There is no difference between a bitcoin wallet with 0 balance and a wallet with 100 BTC of balance in terms of size and modules.

Cryptocurrency wallets usually have addon modules for monitoring network, generating new addresses and signing transactions. The mentioned modules are not an essential part of the wallet itself and wallet is complete by just having the private key stored in it. The person whol holds and have access to the private key can control assets, generate addresses and sign transactions.

Private key is the necessary element in accessing funds but not the sufficient. A person/server will require access to derivation paths as well as the private keys to access the wallets. With derivation paths becoming standard in BIP32, BIP39 and BIP44 proposals for conventional cryptocurrency wallets private keys become the sufficient element to manage a wallet however it is not necessarily the case if a custom derivation path is used for a wallet.

In general terms cold wallet is a (private key + derivation path) storage solution that is frequently accessed and as a result risk of its disclosure is high. The access could happen through internet, local network or even physically. Cold wallet is not only a method of storage but a set of policies for accessing the information. For instance a hardware wallet can be called a cold wallet if it is isolated form computers and is kept secured in vault. Whenever accessing the funds in a cold wallet is required an authorized person/persons should create a transaction within the wallet environment and sign it. Once the transaction is created and signed it can be transferred to a network connected computer to be broadcasted to the network.

Coldness of a wallet is a fuzzy term and there is no exact definition for that. When requiring a cold storage a person/organization is responsible to study and assess the risks for their case and design the policies and procedures; one of which will be using a network isolated and hardly accessed wallet.

Lincoin can be vital piece in designing a cold storage approach by being compatible with cold addresses and offering custom derivation paths. The several possibilities for an organization that use Lincoin a Wallet as a Service solution. Organizations can choose to fully/partially host their hot wallets on Lincoin and define custom and secure derivation paths. If you choose to host the hot private keys on Lincoin you can set an automated TX on balance of the wallet and whenever the balance reaches your risk tolerance send the excess balance to a cold wallet. Alternatively if you don’t host the private keys on Lincoin, you may simply set an alert and receive a notification whenever the conditions are fulfilled. Lincoin easy to use GUI and sophisticated API gateway makes all of these procedures easy and delightful.

A cold wallet can also be used as a payment gateway on Lincoin so that your funds secured at a cold level from the first second being sent to you.

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