There are various ways of keeping money safely. In the same way, people can store their cryptocurrencies and other digital assets in various ways. The popular way to store cryptocurrencies is through wallets. In some cases, people keep their cryptocurrencies on exchanges and crypto platforms.
Whereas many people prefer keeping their digital assets in wallets, they can also store them in vaults. There are advantages of using vaults which we will discuss below. The knowledge of how cold storage wallets function helps us to understand how vaults work.
Cold storage wallets
Cold storage wallets involve keeping cryptocurrencies and other digital wallets offline, or off the internet. When you keep them offline, they are safe from the threat of hackers. However, users of cold storage wallets find them to be less convenient when carrying out daily transactions. Therefore, they keep some of their cryptocurrencies in standard wallets.
There are different forms of cold storage wallets which include paper wallets, hardware wallets, sound wallets and deep cold storage.
What are vaults?
Now that we have discussed in short what cold storage is, we can easily grasp the concept of vaults. Like in the case of ordinary cold storage wallets, vaults are a secure way of storing cryptocurrencies, since they are not connected to the network.
The digital assets which are stored in vaults have got a unique encryption method that prevents attackers to access the cryptocurrency unless they have access to specific codes. Therefore, vaults store cryptocurrencies like wallets. However, people cannot immediately withdraw the digital assets which are in vaults. There is a need for a certain period of time to lapse before withdrawing the deposited digital assets. We use the term digital assets because people can also store NFTs in vaults.
Generally, people who put their digital assets in vaults do so on the understanding that they do not withdraw them on a regular basis. When users want to use the cryptocurrencies in vaults they first withdraw them to their standard wallets.
Why using vaults
Once you understand the importance of vaults you can use them regularly. As discussed above, vaults are safe as hackers cannot access the coins stored there. Secondly, you can get interest for keeping your cryptocurrencies in vaults. Usually, vaults result in compound interest rates called APY. For instance, with such vaults, the earned interest can be automatically reinvested every 24 hours. Therefore, HODlers can benefit much through keeping their digital assets in them.
Nevertheless, it is important to take precautions when you want to use vaults for storing your digital assets. Like in the case of investments, an individual should keep reasonable sums of their digital assets in vaults. It is also essential to crosscheck conditions for using them, as their terms vary.
There are exchanges, like Coinbase, which have options for users to keep their cryptocurrencies in vaults. As a result, if there is hacking such cryptocurrencies are secure.
In summary, the major difference between vaults and wallets is that people can earn interest from digital assets stored in vaults. On the other hand, they do not get rewards for keeping them in standard wallets.