What is a warm wallet? It is a layer between hot and cold wallets: its signing environment is not fully offline like a cold wallet, but it cannot sign automatically like a hot wallet either, and every outgoing transfer requires manual approval or additional verification. Businesses use it to hold medium-sized funds that may be needed in the near term. There is no single technical standard for warm wallets, and definitions vary slightly between institutions.
How Is a Warm Wallet Different from Hot and Cold Wallets?
As with the difference between hot and cold wallets, the biggest differences lie in how transactions are signed and how strictly they are approved. Hot wallets sign automatically via API, and transactions within the rules need no human intervention; a warm wallet’s signing device can be online, but every transaction must be confirmed by one or more people; cold wallets sign in an offline environment and have the longest process. As a result, moving funds out of a warm wallet may take minutes to hours, much faster than a cold wallet, yet without the risk of a hot wallet being drained automatically once its credentials leak.
What Funds Go in the Hot, Warm and Cold Tiers?
Hot wallets hold funds to be paid out in the short term, warm wallets hold buffer funds used to top up hot wallets, and cold wallets hold long-term reserves, with funds flowing from cold to warm to hot tier by tier.
How Should Businesses Build a Tiered Wallet Structure?
First, set balance limits for each tier along with corresponding transfer limits, requiring more approvers and stronger verification at higher tiers. Second, restrict the direction of funds: warm and cold wallets may only send to whitelisted internal addresses, and external payments are made only from hot wallets. Transfers between tiers should follow the secure process for moving funds between hot and cold wallets, and these internal transfers should be separated from external payments during reconciliation.
Conclusion
A warm wallet is a layer between hot and cold wallets whose signing requires manual confirmation, used to hold buffer funds for topping up hot wallets. Businesses can allocate funds across hot, warm and cold tiers, increase approval strength tier by tier, and restrict the direction of funds between tiers. Safeheron’s MPC Wallet-as-a-Service provides businesses with MPC key management and a policy engine.
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