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Keeping crypto assets safe is a recurring discussion in the market. The topic heats up when news of network hacking breaks out, as recently with Solana. Furthermore, the debate gains new outlines in light of Web 3.0. After all, how can the crypto asset be kept secure in Web 3.0?

In Web 3.0, user identification will be more personalized, and the wallet can do the user ID routes. In other words: the risk of leakage gets relatively higher. The path that was taken in Web 2.0, with more secure wallets, may not be the one that will work in Web 3.0. But first, it is necessary to understand how crypto wallets work today.

Wallet: a short guide

“There are several wallets available on the market with different functionalities, security factors, convenience, accessibility, and availability; so there are wallets better than others for different purposes”, says NovaDAX Customer Experience Manager Cesar Felix.

Today, to differentiate what a cold wallet and a hot wallet are, one must first understand the mechanism of it all. Crypto assets are not issued as an official currency, which means that not only do they not exist in the physical world, but they are also not stored in a central bank, a hub or a single server.

Crypto assets are on the blockchain, which records all asset transactions. This record is shared and verified by several individual keys, that is, by several investors.

A wallet certifies that the key of the user who holds it is valid. So, in other words, the idea that a wallet is almost like a physical wallet, in which you can store crypto assets and take them out when you need them, is not accurate. Instead, what they do is store the security keys.

Thus, the wallet is a space to store passwords, which are encrypted codes. Only with the so-called “private keys” is it possible to access the assets that are on the blockchain. If one loses access to these passwords, one also has no access to the assets.

Hot and Cold

Imagine a person losing a wallet with all his bank passwords, credit card codes, and documents. The terror this scene causes in our imaginations is precisely the concern in the crypto market. You cannot leave the “passwords” for every crypto asset stored anywhere.

There are two types of wallets on the market: hot and cold. Hot wallets are software-based and therefore need to be connected and online to work. For those who trade crypto assets or do a lot of crypto transfers, the “hot” wallets are suitable.

“Hot wallets are usually connected to an exchange, are often easy to use, and have opened up space for a more mainstream market”, said Nicole DeCicco, founder of CryptoConsultz, in an interview with TIME Magazine’s NextAdvisor.

“But there are a lot of risks in keeping your funds online”, Nicole said. And that’s where ‘cold wallets’ come in.

Cold wallet’s good (and not so good) sides

Cold wallets are also called hardware wallets (or ‘hard wallets’). This is because they are devices where the user can store their private keys. The main characteristic of a cold wallet is that it is not connected to the Internet, i.e., the key storage is cold.

These are considered more secure wallets since they are not online, which means they are not vulnerable to hacker attacks. Most cold wallet devices are USB devices. And the user needs to plug it in to be able to access the private keys of the crypto assets.

“They are generally used to store a large amount of money that will not be moved often”, explains Felix. Therefore, this type of wallet is ideal for those who want to buy and hold crypto assets for a long time. But if the person wants to buy and trade the crypto asset or withdraw the amounts after a while, cold wallets are not a good choice.

Paper wallet?

One observation is that there are even paper wallets. That’s right; the paper crypto wallets, are nothing more than the printed record of the private key, which is the “master” for manipulating the public keys.

Usually, QR Codes are printed to facilitate the transaction of crypto assets. Therefore, it is recommended that the printed record be kept in a secure space, such as a safe.

It is not always possible to trust…

Putting your assets offline helps protect against hackers and online attacks, but there is also the risk of losing them. There is no backup for this form of storage; if you lose your wallet, you also lose access to your investments.

Take the case of British James Howells, who lost more than 8,000 bitcoins, something close to 150 million Pounds, because he “accidentally” threw away his wallet while cleaning his house.

Or that of Canadian Stephan Thomas, who lost his cold wallet with over 7,000 bitcoins. “I know a lot of bitcoin experts are listening to this and saying that such an event could never happen to me! But I’ve been humbled by this experience”, Thomas told CBC.

But what about Web 3.0?

Web 3.0 will demand more and more from wallets in terms of usability. Interoperability and personalization will be as essential goals for wallets in Web 3.0 as security. Wallets will have to interact with applications in addition to making transactions. A Web 3.0 wallet will have to be able to hold keys for crypto assets ranging from coins to NFTS.

In addition, the decentralization of Web 3.0 will put more pressure on individuals to take responsibility for their data. This means it will also require users to think more and more about digital data security and privacy. Instead of discussing cold or hot, the market will increasingly migrate to discussions about custodial and non-custodial wallets.

In the future, it is expected that users will not need to choose between ‘cold’ and ‘hot’, but will have a hybrid (or maybe a warm?) model operating Web 3.0. The idea is to integrate hardware security with the online experience of hot wallets.