Blockdaemon Blog

Institutional Benefits of One Wallet Platform Versus Separate Hot & Cold Wallets

Wallet
Feb 2, 2024
By:
Conor
Keville
&
Using fewer wallets from fewer vendors can lead to lower costs and more streamlined, efficient operations.

Most banks, custodians, exchanges, and other institutions rely on various wallets from different vendors to meet their diverse operational needs. In some cases, separate wallets are used for internal and customer-facing applications for isolation and compliance. In those instances multiple wallets may be required, but in most cases this multi-wallet, multi-vendor scenario is a result of the historic lack of solutions supporting diverse requirements. Using fewer wallets from fewer vendors can lead to lower costs and more streamlined, efficient operations. Let’s explore.

Why Use Multiple Wallets?

Many institutions use a combination of hot, warm, and cold wallets. Let’s quickly review some of their attributes:

Cold Wallets

Cold wallets, typically air-gapped, store large digital asset values over long periods, enhancing isolation from online threats. These wallets have extra physical security controls, limiting who has access and requiring physical, in-person operations for transfers. Another common practice is to require multiple parties to participate in the transfer of assets to external wallets, either using MPC or historically multisig. These added measures increase security but they can severely impact operational latency and efficiency. As a result cold wallet transactions are typically minimized to use as infrequently as possible.

Warm Wallets

Warm wallets, online with advanced security and control, bridge hot and cold wallet functions. These wallets are designed with multiparty approvals, again using MPC or multisig, and preferably come with policy controls to enforce different quorum approvals for different transaction types. Warm wallets are typically used to fund hot wallets and to support higher value transactions that warrant manual approvals with higher levels of control. 

While warm wallets face increased vulnerabilities due to their online nature, their increased security measures make them highly secure and much more operationally efficient than cold wallets. As a result, most institutions will hold sufficient funds in their warm wallets to satisfy operational requirements for the day, week or other specified intervals during normal levels of market activity.

Hot Wallets

Hot wallets are online wallets intended for use with frequent, routine transfers, typically for lower value transactions or to whitelisted addresses with automated approvals. Efficiency and automation are key attributes of hot wallets, with less emphasis on policies and multiparty controls.

The attributes between these different wallet types are material. It’s easy to see why multiple wallets, typically from different vendors, were used in the past.

Economic and Time Saving Benefits of Consolidation

The multi-wallet, multi-vendor model is highly inefficient, resulting in multiple vendor relationships, license agreements, support agreements, internal support experts, and operational inefficiencies resulting in material added expense and time to execute. 

Each of the above parameters can have a significant impact. For example, larger companies typically do not just accept their vendor’s new software or hardware releases without first conducting considerable due diligence to verify security, compliance, operational integrity, and organizational readiness to support. When managing multiple vendors, which represent multiple wallet products, this non-trivial recurring time and resource cost increases with each vendor and product. 

Acquiring multiple products from one vendor is materially easier and less resource intensive than managing multiple vendor relationships. Consolidating multiple products into one product platform is even better and can reduce many of these time and economic considerations by 33% to 67% or more.

Operational Efficiency Benefits of Consolidation

Using multiple wallet products results in subtle but compounding operational inefficiencies. Examples range from the training and onboarding experience of new users, to inter-wallet transfers and settlement, auditing, technical support, upgrades, and the inconsistency of processes and procedures across different wallet products. 

Let’s start by considering the onboarding of new users. When using multiple wallets from different vendors users are forced to work with different user interfaces, with different processes and procedures, often using different vocabulary. Requiring users to work with multiple diverse systems can result in longer training and ramp up intervals and more frequent mistakes. In contrast, using one wallet platform supporting hot, warm, and cold accounts results in a common platform training, with common operational norms, common user experience, common vocabulary, common technical support, common upgrades, and reduced training and ramp up intervals.


Next let’s consider the impact to daily operations. Transferring funds from a warm to a hot wallet involves entering an external address, unlike choosing from known internal accounts. Once the transaction has executed the user will need to log into a different wallet system to confirm receipt of the transfer. If internal policies require an audit and settlement for the transfer of assets between wallets the admin will have to work with two different systems to generate two different reports, and then manually verify a match on both systems. In contrast, if they had one system supporting both warm and cold accounts, the transfer would happen within the same system, viewable from the same dashboard, with audit logs capturing both the transfer and deposit in the same system. The time effort and user experience is materially different and on scale results in material efficiency gains. 

Enterprise-Wide Wallet Security, Transparency, and Efficiency

Blockdaemon Institutional Wallet, a unified platform, supports hot, warm, and cold wallet operations across all wallet accounts, offering unmatched security, transparency, and efficiency. This integrated approach yields the benefits of a single vendor, single product wallet solution, while providing the features and functionality of individual, application specific wallets. 

With Institutional Wallet, the difference between a hot, warm, or cold account is defined by a combination of policies, key storage, and key signing modes as specified by the institution. 

  • Cold accounts typically require a rigorous set of policies with human approvers to be fully satisfied before an offline, air-gapped set of MPC key shares can be used to sign transactions. 
  • Warm accounts require a set of moderate to advanced policies with human approvers to be satisfied before an online set of MPC key shares can be used to sign transactions.
  • Hot accounts may require only a limited set of policies such as verifying that transfers are limited to pre-approved addresses, and/or with values below predefined thresholds.

In all cases, the same Institutional Wallet platform is managing transaction creation,policy enforcement, mobile approvals (when required), transaction signing, dashboard reporting, and audit logging for all transactions across all accounts. The result is complete uniformity, transparency, and end-to-end accountability, with industry leading security and control.

These attributes combine with uniformity of operations, streamlined internal transfers, end-to-end auditability and reporting for dramatic efficiency gains and ultimately improved digital asset liquidity.

Visit our website to learn more and watch our demo video on cold wallet transaction creation, policy enforcement, and air-gapped transaction signing. And please be sure to contact us with any questions.

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