What is a Hot Wallet?
Wallets are important to how blockchains work. Although they do not directly impact how blockchains function, they are essential for holding digital assets of all kinds on the blockchain. Alongside its core function, a hot wallet makes it easy for users to conduct transactions on a blockchain network.
TL;DR
- Wallets help to organise and hold users’ digital asset portfolios in one location on the blockchain
- Hot wallets are domiciled online and are always on the internet, making them easily accessible and convenient for users at all times
- Hot wallets are more susceptible to hacks and are the easiest to hack among blockchain wallets
Wallets in Blockchain Technology
Wallets are essential for storing and holding digital assets on the blockchain. All transactions authorised on a blockchain are either sent or received through a wallet address. In essence, a wallet serves as a repository for holding and transacting digital assets on a blockchain. These assets can vary from altcoins and stablecoins to non-fungible tokens and asset-backed securities.
Each blockchain wallet helps a user to generate unique wallet addresses which serve as the means to transfer and receive assets on the network. These addresses differ for each token that is supported and no two wallet addresses are ever the same.
When a user has funds in their wallet, they will be able to see at a glance, the type of asset they hold as well as the market value of the individual assets contained in the wallet.
Blockchain Hot Wallets
Hot wallets are just one of the varieties of wallets that users can deploy for storing their digital assets. Hot wallets are domiciled on the blockchain and are ever connected to the internet. This “always online” capability makes them appealing, convenient, and easy to use for all.
It is even more important for users who frequently conduct transactions on the blockchain. Daily crypto traders will find hot wallets convenient for their trading activities. The catch for hot wallets is that users need not worry about misplacing them, as is possible with cold wallets. The sole responsibility of safeguarding the wallet has been passed to the wallet provider — this could be a centralized exchange like Binance or an independent wallet service provider like Metamask.
The user is only tasked with keeping their private keys (for independent wallets) or these keys can be kept by the service provider (in the case of a centralised exchange)
Susceptible to Hacks
As convenient as hot wallets could be, they still have their downside. They are the most prone to hacks and cyber attacks among the types of crypto wallets. Since hot wallets are always online, they become easy targets for hackers seeking to steal funds. Hot wallets are the usual victims in instances of exchange hacks. You can read about some of the biggest hot wallet hacks ever recorded in this link.
Also, it is possible that hot wallet users lose their assets in the event that a blockchain project declares bankruptcy as funds contained on the platform would have to go down along with the project.
It’s a Trade-Off
Users generally have to make a trade-off between convenience and security when determining which type of wallet is most suitable for them. A hot wallet makes it easy to conduct transactions on the blockchain but it is prone to attack. On the other hand, cold wallets offer greater security as assets are stored offline, but they are not convenient to use.
Conclusion
Hot wallets are the most popular type of wallet used on the blockchain. It has got its benefits and disadvantages at the same time. It is up to you to decide if a hot wallet really serves your purpose more than any other wallet options around.
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