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Hardware Wallets and Cold Wallets: What’s the Difference?

Read 4 min
Key Takeaways:
— Your private keys are crucial to your crypto and how you store them is critical to their safety. 

— The main threats to your private keys are hacks, which are deployed via your internet connection – this is why offline storage for your keys is so crucial.

— But even offline wallets exist in two different categories: cold wallets and hardware wallets. There are important distinctions between the two, and understanding how to deploy each one is critical for your security.

— A hardware wallet that is active online still faces threats from smart contract interactions – only an inactive, truly cold wallet is completely safe. Here, we explain.

Cold wallet, hardware wallet – it’s the same thing, right? Actually, these are two different things with different utilities and levels of security. And the most interesting part? Both can exist within the same Ledger device. Here we explain.

Storing your private keys offline is one of the tenets of crypto security. Crypto is a digital world, and the main threats to your precious private keys exist online; this means that for your private keys to be secure, they need to be in an offline wallet.

Sounds simple, right? Using an offline wallet means your keys stay completely isolated from invisible online hackers.

Risks Beyond Hacking – a Tale of Digital Deception

But there’s more to it than that: not all scams rely on hacking. Some of the most prolific crypto scams to date have involved tricking the user into giving access to their wallet under false circumstances – and since these are instances where the wallet owner themself opened the door to the scammer, even an offline key cannot protect your crypto here.

Even the most experienced Web3 user makes mistakes, so staying secure is not just about keeping your keys offline, but also taking measures to ensure your exposure is minimized if/when you ever make the wrong call. This is where your two different levels of “offline key” come in.

Here, we explain the difference between a cold wallet and a hardware wallet, why it’s so important to use both as you explore Web3 and how this set-up offers you the very highest level of protection overall.

Hardware Wallets: For Talking to Smart Contracts

Web3 is built on smart contracts, and hardware devices like the Ledger device are designed to allow you to interact with platforms and services, even while your private keys stay inside the wallet.

But that brings some different risks. Exploring Web3 means interacting with those smart contracts: be it lending, borrowing, swaps or even buying and selling on NFT marketplaces, all of these interactions are executed by smart contracts, which you sign using your crypto wallet private key.

Beware False Friends

Signing smart contracts is unavoidable for Web3 users, but they are also a new vector of scams to be deployed.

When you sign a contract (any contract), you’re agreeing to what the contract says. By signing it, you’re accepting that you’ve seen the terms and agree to the conditions. But there are some frictions with that.

  • Blind Signing

First, not all smart contracts can be fully displayed to users on a hardware wallet. This means you’ll be agreeing to the interaction based on trust, rather than full knowledge of the contract conditions.

  • Human Error

Second, even if you CAN see the contract details, not everyone knows what to look for, or how to detect a red flag.

A recent scam saw users of PREMINT giving a scammer access to their wallet via a smart contract approval, believing they were signing a harmless confirmation. The information wasn’t hidden – it simply seemed harmless enough to sign without further inspection. This led many people to give the scammer access to their wallet.

If you’ve ever skipped the small print as you installed new software on your computer, or skimmed through the Ts and Cs when you joined a social media platform, this is the sort of mistake that could absolutely happen to you too.

Mistakes are Inevitable

The subjective nature of reading smart contracts means they pose a risk that a wallet alone can’t prevent. And the real rub is that a mistake will impact not just one asset, but everything in the signing wallet.

The bad news: we can’t change that, no matter how secure our wallets are. The good news: we absolutely can show you how to mitigate the risk – and you can even do it from your existing Ledger device.

This is where a true cold wallet comes into play.

Cold Wallets: Offline Keys, Inactive Wallet

Like an active Web3 wallet, your cold wallet keeps your private keys offline, meaning it can’t be hacked. But what it does not do is interact with smart contracts – in other words, the definition of a cold wallet is a hardware wallet that you don’t use it for Web3 exploring.

Why Staying Inactive Defines Your Cold Wallet Security

The risk of signing a smart contract is that it could interact maliciously with the content of your wallet. But that risk doesn’t just “happen” – it only becomes an issue if you use your wallet to sign transactions. No signing = no risk activated. This is the definition of a “cold wallet”.

Since only a completely inactive cold wallet offers absolute security for your assets, it’s clear that this is how you should be securing the bulk of your assets, in order to protect them from malicious contracts.

Cold Wallet, Hardware Wallet – It’s Up To You

YOU yourself determine whether a specific wallet address within your Ledger will be cold or not, by deciding whether you will use it to sign transactions. Luckily, with a little bit of admin and a clear plan, this is something you can do easily from within your Ledger device.

Segregate your Assets

For each blockchain asset, you can create multiple, separate accounts. Each of these is isolated, and not impacted by anything that happens to the others. The result? If you make a mistake and sign a malicious smart contract with your active Web3 wallet, the est of your assets will remain safe.

Only when you want to spend or sell a given asset should it be transferred to your active wallet – thus minimizing your risk, while leaving all of your options open.

With Ledger, all of your keys are offline at all times. But it’s up to you to decide how much of your crypto is exposed to smart contract risk. You are in charge, and we’re here to make sure you understand your options, and enable you to make sound choices as you use the safest wallet in the space.

Secure storage, the choice is yours

Security isn’t about hoping for the best – it’s about being prepared for the worst, no matter how careful you are. And by taking these simple steps to segregate your assets, you’ll be free to explore the digital ecosystem with an open mind and minimal worry!

Be bold, be safe, stay educated

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