100,000 Questions and Answers about Cryptocurrencies 84

What is a cold wallet?

A cold wallet, also known as a hardware wallet, is a physical device that stores users' private keys offline, providing a highly secure way to store cryptocurrencies and other digital assets. Cold wallets are immune to online threats and hacking attempts, making them a preferred choice for storing large amounts of digital assets.

How does a cold wallet work?

A cold wallet works by generating and storing private keys offline on a dedicated hardware device. The device is typically connected to a computer when needed to sign transactions, but it remains disconnected from the internet most of the time. This isolation from the internet makes cold wallets impervious to online hacking attempts and other cyber threats. Users interact with the wallet through a secure interface on the device itself or through a dedicated software application that runs on a computer or mobile device.

What is a hot wallet?

A hot wallet is a wallet that is connected to the internet, allowing users to access and manage their digital assets from any internet-connected device. Hot wallets are convenient for everyday use but may be less secure than cold wallets due to their online connectivity.

How does a hot wallet compare to a cold wallet?

Hot wallets and cold wallets differ primarily in their security and convenience. Hot wallets are connected to the internet and allow for easy access and management of digital assets from any internet-connected device. However, this online connectivity makes them more vulnerable to cyber threats and hacking attempts. In contrast, cold wallets store private keys offline on a dedicated hardware device, providing a highly secure way to store cryptocurrencies and other digital assets. Cold wallets are immune to online threats but may be less convenient for everyday use.

What is the difference between a custodial and non-custodial wallet?

A custodial wallet is a wallet where a third party, such as an exchange or wallet service provider, holds and manages users' private keys. In contrast, a non-custodial wallet allows users to maintain full control over their private keys and digital assets, without relying on a third party.

Why is it important to use a non-custodial wallet?

Using a non-custodial wallet is important because it allows users to maintain full control over their private keys and digital assets. This means that users are responsible for securing their own funds and have complete autonomy over how they use and manage their digital assets. In contrast, custodial wallets rely on a third party to hold and manage private keys, introducing potential risks such as central points of failure, security breaches, or restrictions on asset usage.

What is the difference between a public address and a private key?

A public address is a unique identifier that is used to receive funds and transactions on the blockchain. It is derived from a user's private key using cryptographic algorithms and can be shared publicly without compromising the security of the user's funds. In contrast, a private key is a secret code that is used to access and control digital assets on the blockchain. It must be kept secret at all times to prevent unauthorized access to the user's funds.

How do public addresses and private keys work together?

Public addresses and private keys work together to enable secure transactions on the blockchain. The public address serves as the destination for funds and transactions, while the private key is used to sign transactions and prove ownership of the funds. When a user wants to send funds, they use their private key to create a digital signature that authorizes the transfer. This signature is attached to the transaction and verified by the network using the public address associated with the funds being sent. This process ensures that only the owner of the private key can authorize the transfer of funds.

What is a seed phrase or mnemonic?

A seed phrase or mnemonic is a series of words that is used to generate a user's private keys and restore access to their digital assets in case of loss or theft. Seed phrases are typically generated by wallet software and provided to users during the wallet creation process. They should be kept secret and stored securely to prevent unauthorized access to the user's funds.

How important is it to securely store a seed phrase?

Securely storing a seed phrase is crucial because it is the only way to recover access to digital assets in case of loss or theft of a wallet or private keys. If a user loses their wallet or private keys and does not have their seed phrase securely stored, they may permanently lose access to their digital assets. Therefore, it is essential to keep seed phrases safe and secure, preferably offline in a physical location that is not easily accessible to others.

What is a blockchain oracle?

A blockchain oracle is a service that provides real-world data to smart contracts on the blockchain. Smart contracts are limited to the data available on the blockchain itself, which may not include all the necessary information for certain applications. Blockchain oracles bridge this gap by fetching and delivering external data to smart contracts, enabling them to make decisions based on real-world events and conditions.

How does a blockchain oracle work?

A blockchain oracle works by fetching data from external sources, such as APIs, databases, or other trusted data providers. This data is then verified and authenticated by the oracle service before being delivered to smart contracts on the blockchain. Smart contracts can then use this external data to make decisions or trigger actions based on real-world events and conditions. The oracle service ensures the integrity and reliability of the data being delivered to smart contracts, helping to ensure that they operate as intended.

What is gas in Ethereum?

Gas in Ethereum refers to the fee required to execute transactions or run smart contracts on the network. Each operation performed on the Ethereum blockchain consumes a certain amount of gas, and users must pay a fee in Ether (ETH), the native cryptocurrency of Ethereum, to cover the cost of the gas used.

How does gas work in Ethereum?

Gas works in Ethereum by requiring users to specify a gas limit and gas price for each transaction or smart contract execution. The gas limit is the maximum amount of gas that the user is willing to pay for the transaction, while the gas price is the amount of Ether per unit of gas that the user is willing to pay. The total gas fee is calculated as the gas limit multiplied by the gas price. When a transaction or smart contract execution is submitted to the network, the miner who includes it in a block collects the gas fee as a reward. This fee mechanism helps to ensure that the network remains secure and stable by providing an economic incentive for miners to validate and include transactions in blocks.

What is a gas limit?

A gas limit is the maximum amount of gas that a user is willing to pay for a transaction or smart contract execution in Ethereum. It represents the upper bound on the computational resources that the user is willing to consume for the operation. If the actual gas used exceeds the gas limit specified by the user, the transaction will fail and any gas fees paid up to that point will be refunded.

How do I choose a gas limit for my transaction?

Choosing a gas limit for a transaction in Ethereum depends on the complexity and computational requirements of the operation being performed. Simple transactions, such as sending Ether from one address to another, typically require a relatively low gas limit. More complex operations, such as interacting with smart contracts or executing complex computations, may require a higher gas limit. Users can estimate the gas limit needed for a transaction using tools provided by wallet software or by consulting documentation or forums related to the specific smart contract or operation being performed. It is generally advisable to set the gas limit slightly higher than the estimated amount to account for any unexpected complexities or variations in the transaction.

What is a gas price?

A gas price is the amount of Ether (ETH) that a user is willing to pay per unit of gas for a transaction or smart contract execution in Ethereum. The gas price is set by the user and represents the market price for computational resources on the Ethereum network. Miners prioritize transactions with higher gas prices when selecting which transactions to include in blocks, as they receive a higher reward for validating and including these transactions.

How do I determine an appropriate gas price?

Determining an appropriate gas price for a transaction in Ethereum depends on the current network conditions and the urgency of the transaction. During periods of high network congestion, miners may prioritize transactions with higher gas prices to maximize their rewards. Therefore, setting a higher gas price may increase the chances of a transaction being included in a block quickly. Conversely, during periods of low network congestion, setting a lower gas price may be sufficient. Users can monitor the current gas prices and network conditions using tools provided by wallet software or blockchain explorers. They can also consult community forums or pricing guides to get recommendations for appropriate gas prices based on their specific transaction needs and network conditions.

What is an ERC-20 token?

An ERC-20 token is a standard for fungible tokens on the Ethereum blockchain. It defines a common set of rules and functions that allow tokens to be easily created, issued, and transferred on the Ethereum network. ERC-20 tokens are compatible with most Ethereum wallets and decentralized applications (dApps), enabling seamless integration and interoperability within the Ethereum ecosystem.

How does an ERC-20 token work?

An ERC-20 token works by implementing a standard set of functions and rules defined in the ERC-20 token standard. These functions allow tokens to be created, issued, transferred, and approved for spending by other addresses. ERC-20 tokens are typically deployed as smart contracts on the Ethereum blockchain and interact with other smart contracts and decentralized applications (dApps) using the Ethereum Virtual Machine (EVM). When a user wants to transfer an ERC-20 token, they interact with the token's smart contract using their Ethereum wallet. The smart contract verifies the transaction and updates the balances of the sender and receiver accordingly, ensuring that the tokens are transferred securely and accurately.