The blockchain and digital currencies industries are becoming a rapidly developing alternative to the global traditional economy. With its inherent advantages that are beset in the underlying blockchain technologies supporting such disruptive financial evolutions, the decentralized economy is becoming a favored environment among millions of users worldwide. The multiple opportunities for monetization, passive income, earning, trading value-saving and investments that the digital currencies market offers allow users to divert their capital from traditional banks in favor of digital assets. Such dynamics are leading to a general migration of not only traditional banking users, but also strata of entire nations’ unbanked populations into the digital economy, provoking massive capital movements and leading to overall increases in decentralized industry capitalization.

However, no matter how advanced blockchain technologies become and how fast their transaction throughputs turn out to be with every additional upgrade in the myriad of networks operating on the market, the fact remains that all transactions within the decentralized industry take place through its constituent central access-points – the wallets.

Cryptocurrencies differ from traditional fiat money primarily in that they are stored not in a leather wallet or some form of virtual bank, but directly inside the blockchain ecosystem. The coins themselves, or rather the information about the distribution of digital assets between users, the transaction history, and all other relevant data is stored by the chain. Such information is immutable, it cannot be altered or erased in any way, except by means of the total destruction of the global internet network, which will be tantamount to the end of modern civilization as we know it.

Wallets make up the backbone of all blockchain transactions, initiating them and acting as receiving and sending addresses for all coins and tokens. Users rely on the wallets they hold for securing their digital currencies, accessing trading venues, transferring assets between other wallets and to recipients during sales and exchange transactions, and much more. The vital role played by wallets has led to the emergence of thousands of various services and projects that offer an innumerable variety of wallets to suit every taste and requirement, each brandishing unique security solutions, streamlined and convenient interfaces, an expanded set of functionality, or a combination of all together taken. But that is where the similarities end.

No matter how advanced wallets become, the two main types remain unchanged as the market revolves around the use and eternal debate over hot and cold wallets.

Hot wallets are a specialized form of online repositories of digital currencies. These types of wallets exist solely online and are perpetually tied to the internet, making their availability, and the availability of the coins stored therein, a matter of internet connection availability. Hot wallets are the repositories of choice for crypto exchanges, decentralized retail platforms, merchant services provider venues, blockchain-based service platforms, dApps, and any number of other decentralized products and service ecosystems that require quick, hassle-free and streamlined access to digital currencies for making transactions. Hot wallets leverage the majority of blockchain’s advantages, including ease of use, convenience, low commissions, high transaction speeds, connectivity across various blockchains, as well as high security, full transparency and immutability of all transaction records.

Though highly convenient and available on any mobile or desktop device, hot wallets do have some disadvantages that dissuade some users from resorting to them for storing large volumes of digital assets. Among the most common issues that are being raised as criticism aimed at hot wallets is their susceptibility of being penetrated by malignant entities, such as hackers. The fact that exchanges that get attacked lose portions of their users’ funds is because the wallets of said platforms are “hot” by nature and all the assets are stored online with direct access to them for ease and speed of accessibility during trading sessions. However, the reasons for such hacks are largely human error or faults in the security systems of the exchanges themselves, thus removing any shadow of doubt or blame from the wallets’ core structure as the weak point in the chain of responsibility.

Another important factor about hot wallets is that they may be divided into categories as custodial or non-custodial. The difference between the two types is the entity that holds custody over the wallet. In the case of custodial wallets, such as those operated by crypto exchanges, the private keys that give access to the wallets are held by the operating platform, as well as the backups necessary. The advantage of custodial wallets is that the funds maintained on them will never be lost even if the seed phrase or private keys are lost. The users will always retain their assets and will receive backups or refunds.

As for non-custodial wallets, the users have full custody of the mnemonic phrases, the private keys, and the funds maintained in such repositories. Non-custodial wallets are the sole responsibility of their owners, and lost private keys mean eternal loss of access to the funds held within the wallets.

Cold wallets are the repository of choice for users who either hold large amounts of assets that do not require constant and quick access, unlike hot wallets, or are mindful of the security of their digital currencies. In essence, cold wallets are little more than offline repositories that store a record of the digital assets a user owns. Cold wallets are much like USB memory sticks that are disconnected from a device with internet access, meaning that they will be available online only upon connection to a receiver like a laptop or computer terminal.

A cold wallet is the most secure type of digital currency repository, since it is connected to the internet only the moment the stick is inserted into the computer access port and a connection is established. This means that outside the timeframe of connection to the internet, the funds stored therein are perpetually locked as records on the blockchain that cannot be accessed by anyone other than the person holding the private keys to the wallet. Though highly secure and stylish in appearance, cold wallets are cumbersome and inconvenient for most users, as they do not allow instant access to the funds and are often limited in their functionality.

Wallets, in their many forms and functions, are the indispensable cornerstones of the blockchain and decentralized services market. However, despite their high degree of penetration in the market, most wallets available today suffer from a host of limitations that do not allow them to become mainstream among a vast majority of users, especially those unfamiliar with blockchain technologies and digital currencies.