Digital asset wallets enable users to safely store, send, and receive digital assets, providing security and convenience for institutions to expand their user base. They are essential components of the digital ecosystem, serving as secure tools that utilize encryption to protect digital assets.
The classic saying in the overseas Bitcoin community, "Not your keys, not your Bitcoin," emphasizes the importance of owning and controlling private keys - you truly own your digital assets only if you control the private keys. Therefore, the protection and secure storage of private keys are critical for all participants in the cryptocurrency space.
In this blog, we focus on three digital asset storage solutions related to private keys: cold wallets, hot wallets, and MPC wallets, offering institutions insights and guidance to develop a secure and reliable digital asset wallet.
Cold Wallets
Cold wallets, known for their heightened security, are offline storage devices that shield private keys from the internet, much like a standalone safe. This isolation from online threats renders them virtually impervious to hackers, making them a reliable option for safeguarding assets against cyber-attacks and unauthorized access. These wallets exist in various iterations, including hardware wallets, paper wallets, offline computer wallets, and software wallets, all of which secure a pair of keys. The public key facilitates the creation of blockchain addresses for transactions, while the private key, comparable to a password, asserts fund ownership and control. Typically, the private key is encrypted and stored on offline devices, mitigating risks associated with hacking or malware.
Source: Trezor
The advantages of cold wallets are substantial, offering unmatched security due to the offline storage of private keys and complete user autonomy, removing any dependence on third parties. However, these benefits come with trade-offs. Cold wallets can be less convenient for transactions since they require an internet connection and additional steps to access. There's also the inherent risk of physical loss or damage, and they often come with a higher price tag and necessitate a certain level of technical expertise.
Public Key (Address) Image Source: MetaMask
Private key image source: MetaMask
As of 2023, the cold wallet market is populated with notable options like Ledger, Trezor, HyperPay, Cobo, BitPie, TokenPocket, Orient Walt (HTDF), Qtum Electrum, Math Wallet, and Arculus, indicating a robust and varied landscape for secure asset storage. The industry has observed several key developments, such as IBM's crypto partner Metaco utilizing Offline Signing Orchestrator technology, BitoPro introducing the world's first purpose-built cold wallet for cryptocurrency exchanges, and ShapeShift DAO's integration with the WalletConnect v1.0 protocol. A noteworthy collaboration between Taiwan's Pizza Hut and CoolBitX culminated in the release of the CoolWallet Pro Pizza Day edition in May 2022, designed specifically for NFT enthusiasts, underscoring the diverse applications and continuous innovation within the cold wallet sector.
ChainUp Custody suggests that institutions requiring long-term storage of substantial assets may consider cold wallets, similar to the approach taken by Coinbase. Cold wallets are also suitable for entities engaging in high-value transactions and those needing to meet strict compliance standards, as they offer secure asset protection while fulfilling regulatory requirements.
However, it is important to acknowledge the limitations of cold wallets, such as potential inconvenience in usage and the risk of losing private keys. Therefore, institutions should weigh their specific needs and associated risks carefully when selecting a cold wallet solution. They should evaluate the trade-offs between security and accessibility and consider implementing additional safeguards, such as private key backups and physical security measures, to mitigate the risks of damage or loss. By taking a holistic approach, institutions can choose the most appropriate cold wallet that aligns with their operational requirements and security protocols, ensuring that their assets are preserved in a manner that is both secure and compliant with their governance framework.
ChainUp Custody asserts that hot wallets serve as a more convenient option for institutions that frequently engage in digital asset transactions, need to rapidly move assets to other addresses or exchanges, or use wallets for temporary asset storage to facilitate daily operations and service integration. The online storage of private keys in hot wallets provides swift access for transactional activities, offering enhanced flexibility and convenience.
However, the inherent security risks of hot wallets remain a persistent concern in the cryptocurrency industry. Their constant internet connection increases their vulnerability to hacking attempts. Institutions opting for hot wallets must therefore prioritize security measures, assess functionality and cost, and remain vigilant by regularly backing up private keys and safeguarding against network attacks to elevate their security posture.
This cautious approach towards hot wallet usage should be accompanied by implementing robust security protocols, educating staff on security best practices, and employing advanced cybersecurity solutions to defend against sophisticated cyber threats. By balancing convenience with comprehensive security strategies, institutions can effectively harness the benefits of hot wallets while minimizing potential risks.
MPC Wallets
MPC wallets, leveraging Multi-Party Computation technology, offer a unique blend of security and privacy in the digital asset wallet space. They enable multiple parties to jointly compute without revealing private data, thus providing a more secure alternative to traditional hot and cold wallets. The key feature of MPC wallets is the division and distribution of the private key across various devices, requiring consensus for transaction authorization. This approach significantly reduces the risk of key theft, as a hacker would need to compromise all devices simultaneously to access the full key. For instance, if your MPC wallet's private key is split into four parts, each stored on a different device, you would need to sign the transaction on each of these devices. Even if a hacker compromises one device, they can't steal your private key as they would need to simultaneously attack all four devices holding the key fragments. This method positions MPC wallets' security between that of cold and hot wallets — more secure than hot wallets as the private key isn't stored on a single device and more convenient than cold wallets since transactions can be done anywhere, anytime.
Source:b2binpay
The primary advantages of MPC wallets include enhanced security through key fragmentation, the elimination of the need for backup mnemonics, seamless recovery when switching devices, and the ability to support multiple blockchain networks due to their cryptographic foundation. However, these wallets also have drawbacks, such as their dependence on centralized services, potential regulatory risks based on the wallet's framework, and the imposition of risk assessment limits which may introduce a degree of centralization.
Key players in the MPC wallet market include Fireblocks, ChainUp Custody, Copper, and BitGo, each offering distinct features and services. (A comparison between them can be found in more detail in our article, “The Digital Asset Wallet Revolution: A Multidimensional Comparison of Popular MPC Wallets”.) Industry developments highlight the growing adoption of MPC technology, as seen with Binance's introduction of a Web3 wallet using MPC, tech giants like Facebook and Google exploring its applications, OKX's endorsement for its ability to mitigate single-point private key risks, Bitget Wallet's integration of MPC with additional login options, and the collaboration between Safeheron and MetaMask to develop an MPC wallet, indicating a robust and evolving landscape in the realm of cryptocurrency security.
ChainUp Custody observes that MPC wallets, while still in their developmental stages, have already garnered significant attention from major corporations such as Microsoft, Google, and Meta. They are rapidly gaining popularity among consumers, hedge funds, and exchanges in the cryptocurrency sector. This surge in interest comes in the wake of a decade marked by costly cyber-attacks in the crypto world, where the innovative security model of MPC wallets has proven to be more robust and reliable.
As technology continues to evolve, MPC wallets are expected to mature further, broadening their market scope. It is anticipated that MPC will become a standard security feature for most cryptocurrency wallets, especially for institutions managing large assets, requiring multiple layers of security verification and authorization. These wallets are becoming increasingly essential for organizations that need to collaborate with partners or manage assets across various departments, where high security is a paramount concern.
In this context, ChainUp Custody's MPC wallet solutions are enriching the market, positioning themselves as an ideal choice for institutional participants focused on protecting their digital assets. The adoption of MPC technology in wallet solutions indicates a significant shift towards more secure and collaborative asset management practices in the crypto industry, catering to the evolving needs of a diverse range of institutional participants.
The landscape of digital asset wallets is rapidly evolving, with each type - cold wallets, hot wallets, and MPC wallets - offering distinct features tailored to different security needs and operational scenarios. ChainUp Custody's insights into these wallet types reflect a deep understanding of the dynamic digital asset ecosystem, highlighting the importance of choosing the right wallet type based on specific institutional needs and security requirements. As the digital asset world continues to grow and face new challenges, the choice of wallet type will play a crucial role in ensuring asset security, operational efficiency, and compliance with emerging regulatory frameworks. This evolving landscape underscores the need for continuous innovation and adaptation in digital asset management strategies to safeguard assets in an increasingly complex and interconnected digital world.
