Brian Armstrong, co-founder and CEO of United States crypto exchange and wallet Coinbase, has outlined what he believes to be four common misconceptions about crypto custody solutions. His article was published on Fortune’s crypto-focused segment The Ledger on Feb. 22.
Cold storage refers to a method of keeping crypto holdings and users’ private keys offline in order to safeguard against theft via a remote attack. Hot storage, conversely, refers to storage on a device that has an active connection to the internet.
Armstrong’s first argument tackles the perception that hot storage is always necessary to provide the flexibility and speed required to execute trades. He notes that certain platforms allow users to trade over-the-counter (OTC) using delayed settlement, meaning funds remain in offline storage until after the trade has been executed.
As reported, a recent joint venture between blockchain security firm BitGo and Bitcoin (BTC) OTC trading platform Genesis Global Trading similarly allows clients to trade crypto without the need for withdrawals from cold storage.
Armstrong’s second point centers on proof-of-stake (PoS)-based cryptocurrencies, noting that participating in a PoS network and earning returns on staked coins doesn’t necessarily imply the latter need to be stored in a hot wallet.
The CEO gives the example of crypto project Tezos, which allows token holders to delegate their staked funds to a so-dubbed “baker,” who keeps a small portion of funds hot to generate staking rewards — yet customers’ funds remain securely offline.
Third, Armstrong disentangles the relationship between single-key holders and whether storage is hot or cold, noting that designing a crypto custody solution to require multiple keys is a sound measure regardless of whether stored funds are on or offline.
Lastly, the CEO mentions hardware security modules, arguing that they can come close to the security of cold storage — and can undoubtedly be beneficial for custodial architecture — but nonetheless cannot match it. Armstrong closes his article with a note about hot storage, writing:
“With hot storage there are a lot of details that you need to get right to keep the funds safe. Is it possible to get all those details right? Yes, and I’m comfortable using hot storage for reasonable amounts. […] Do I want to bet my entire business on all those details being right indefinitely? Probably not.”
As reported, the industry’s largest-ever crypto exchange hack to date was found to have been facilitated by Japanese exchange Coincheck’s storage of coins in a low-security hot wallet.
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