Cold Storage - “Cold storage” using Bitcoin as an example

Many cryptocurrency storage services list “Cold Storage” or Cold Storage among their advantages. What's behind this technology and how does it work?

The term Cold Storage originally appeared specifically for bitcoin and is associated with the internal organization of the wallet. We've all seen a Bitcoin address many times - an intricate string starting with “1” or “3”, ranging from 26 to 35 characters long.  

Examples:

1Fu5CUREbr5yEDfUMuNMxdJ7TWA2v39K4V

34w8tCWpUCMWhkYhJMtFjPeG9rR8YstCin

Such addresses identify where the bitcoins will be sent. After sending the funds, the recipient sees in his wallet that he has received a certain amount - everything is outwardly simple. 

However, hidden under the hood of any Bitcoin wallet is a fairly developed mechanism that allows not only to identify the transfer, but also protects against the waste of money by third parties.  

A feature of most cryptocurrencies is that the transfer of funds is not made to a specific point in the network, but is broadcast to all available nodes and included in the blockchain around the world. That is, these funds can be spent by any network participant, but under certain conditions. 

The recipient of the funds must prove that he can spend the money. We can imagine that the address is the number of the locker cell. Anyone can open it if they have the correct code or key. 

Thus, in fact, a Bitcoin “wallet” is a combination of two keys, one locks the funds (this is the address) and the second unlocks them, or allows them to be spent. While reading about Bitcoin, you have probably come across the terms “public key” (public key) and “private” or “private” key (private key). 

This is what cold storage technology, orCold Storageis based on. 

“Cold storage”in its strictest sense is the transfer of bitcoins to addresses whose private key can never, under any circumstances, be compromised (disclosed). In the simplest version, these are keys that are obtained on a computer without a network connection. 

A simplified process looks something like this: a program that generates key pairs is installed on a computer that is not connected to the Internet or any other network from a flash drive or other storage device. Private keys are stored on a separate medium or printed in the form of “Paper Wallets” in a special WIF (Wallet Import Format) format, and public keys are used to transfer funds.. After generating the required number of wallets and transferring the data to a secure storage, all information on the computer is completely destroyed, in some cases even the media is physically destroyed.

You can check the balance of any wallet in the Bitcoin network using many online services, such as blockchain.info. Also, most wallet programs (for example bitcoin-qt) allow you to import recipient addresses without a private key, in watch-only mode.

In such a situation, you can be sure that no one will be able to steal the funds received without access to the private keys. 

However, as in the case of a regular wallet, it is important to ensure the safety of private keys, otherwise it will become impossible to restore the wallet and, accordingly, gain access to the money. 

Note that electronic storage is still more reliable, of course, with proper protection of the media. But a paper wallet also has certain advantages.

As for services that promise “cold storage,” you should think twice about whether they implement such a scheme in full or just declare it. After all, in order to gain access to such funds, a relatively large amount of time and direct human participation is required. 

That is, only self-created “cold storage” can be considered truly reliable. We will discuss how to secure a copy of private keys in the next article.