Founder
October 26, 2025
16 min read
Blockchain technology often faces misconceptions, particularly regarding cold and hot wallets, nodes, and authorization processes. This article aims to clarify these concepts, explaining their functions and addressing common misunderstandings. By understanding how wallets manage private keys, how nodes validate transactions, and how authorization is handled, users can make informed decisions about securely managing their blockchain assets.
In blockchain technology, assets never leave the chain. This principle applies to all forms of cryptocurrency, including coins, tokens, and other digital assets. They exist solely within the blockchain’s ledger. As a result, applications and services developed outside the blockchain, such as exchanges, hot wallets, and cold wallets, do not physically hold these assets. Instead, they facilitate access and authorization for users to interact with their assets on the blockchain.
Off-chain applications, such as exchanges and wallet services, function as intermediaries that manage user permissions and interactions with blockchain assets. These applications do not store cryptocurrencies themselves but instead manage the keys and access rights that allow users to perform transactions. This is a crucial distinction because it emphasizes that all actual assets remain within the blockchain, and what users see in their wallets or accounts are merely representations of their access rights.
For users or investors to access and manage their blockchain assets without directly participating in the blockchain network’s rigorous requirements (like maintaining a high-performance GPU or staking large amounts of cryptocurrency), they rely on nodes. These nodes are trusted participants in the blockchain network that have met all necessary requirements and can facilitate transactions on behalf of users. Essentially, users place their trust in these nodes to act correctly and securely within the blockchain network.
Be the first to be informed about our new articles, opinions and case studies in the field of Blockchain.
Ownership and authorization within the blockchain are determined by digital signatures tied to private keys. This key, which must be kept secure, acts as the user’s unique identifier and authorization tool. When a user interacts with their assets through an application, they are not moving the assets off the blockchain. Instead, they are authorizing transactions using their private key, which the network verifies. For example, a wallet displaying 10 ETH does not mean the ETH is stored in the wallet. Instead, the wallet indicates that the user has the authorization to manage 10 ETH on the blockchain, granted by the digital signature from a trusted node or application.
When a transaction is signed with a private key, it proves to the network that the transaction is legitimate and authorized by the rightful owner of the asset. This ensures that even though the physical or digital representation of the assets does not leave the blockchain, the control and rights over those assets are securely managed through the private key.
A single private key can generate multiple public addresses. This feature allows users to create different addresses for various purposes while maintaining control over them with a single private key. For example, a user can generate Address 1, Address 2, and Address 3, all tied to the same private key. Each address can be used for different transactions or activities, enhancing privacy and organizational capabilities within the blockchain network.
The trust placed in nodes is fundamental to the operation of blockchain applications. When users engage with blockchain assets through a wallet or exchange, they are trusting that the node managing their transactions is secure and reliable. This trust is similar to trusting a bank or financial institution to manage one’s assets securely. However, in the blockchain context, this trust extends to the node’s ability to handle digital signatures and authorization processes correctly.
Navigate RWA, smart contracts, and crypto regulations with our expert legal consultancy for various digital asset applications.
Wallets and nodes play crucial roles in the blockchain ecosystem, facilitating user interactions with their blockchain assets and ensuring the integrity and security of transactions.
Wallets are software applications that enable users to manage their blockchain assets. These wallets do not store the assets themselves but rather manage the cryptographic keys that authorize transactions on the blockchain. There are two primary types of wallets: hot wallets and cold wallets.
Hot Wallets: These are connected to the internet and allow for quick and easy access to blockchain assets. They are ideal for frequent transactions but are more vulnerable to hacking and security breaches.
Hot wallets generate private keys online using a predetermined set of words. Typically, a hot wallet uses a random selection of 12 to 24 words from a standardized word list to create a mnemonic phrase. This phrase is then hashed to produce the private key. Because this process occurs online, it is faster and more convenient but also exposes the private key to potential online threats.
Cold Wallets: These are offline and provide a higher level of security by keeping the private keys away from potential online threats. Cold wallets are suitable for long-term storage of assets.
Cold wallets generate private keys offline using secure hardware. The generation process involves a dedicated secure chip or hardware device that creates the private key without any internet connection. This method often uses a similar mnemonic phrase technique but performs the entire process in an isolated environment, ensuring that the private key is never exposed to the internet. This significantly reduces the risk of the private key being compromised by online attacks.
Regardless of the type, wallets show users the balance of their assets and facilitate the signing of transactions using private keys. The actual assets remain on the blockchain, and the wallet merely provides an interface for users to interact with these assets.
Nodes are essential components of the blockchain network, maintaining the distributed ledger and validating transactions. There are several types of nodes, each playing a specific role in the network:
Full Nodes: These nodes maintain a complete copy of the blockchain and validate all transactions and blocks. They are crucial for the network’s security and integrity.
Light Nodes: These nodes do not store the entire blockchain but instead download only the block headers. They rely on full nodes for transaction validation and are more resource-efficient.
Mining Nodes: These nodes participate in the proof-of-work consensus mechanism, solving complex mathematical problems to add new blocks to the blockchain. In return, they receive block rewards and transaction fees.
Nodes perform critical functions, such as verifying transactions, maintaining network consensus, and propagating updates across the blockchain network. They ensure that all participants have a consistent view of the blockchain and that the network remains secure and operational.
ISO 20022: What a Possible Game Changer in Blockchain IndustryCase StudiesOctober 4, 2025👤Sercan Koç
When a user initiates a transaction through their wallet, the transaction is signed with the user’s private key and then broadcast to the network. Nodes receive this transaction and validate it against the blockchain’s rules. Once validated, the transaction is added to the blockchain, and the user’s balance is updated accordingly.
For example, if a user wants to send 5 BTC to another user, their wallet creates a transaction and signs it with their private key. This transaction is then sent to the network, where nodes verify its authenticity and ensure the user has sufficient funds. After validation, the transaction is included in a block and added to the blockchain.
To better understand this process, consider the analogy of a notary verifying a vehicle sale. In this scenario, the vehicle itself does not physically move to the notary’s office. Instead, the notary verifies the documentation and authorization related to the vehicle. The vehicle’s ownership is transferred through the legal paperwork that the notary validates.
Similarly, in a blockchain transaction, the actual asset (such as BTC) does not move. Instead, the nodes act like notaries, verifying the digital signatures and authorization tied to the private keys. When user X sends 5 BTC to user Y, X uses their private key to create a digital signature for the transaction. This transaction is then broadcast to the network, where nodes (acting as notaries) verify the authenticity of the signature and ensure X has the necessary funds. Once verified, the transaction is added to the blockchain, and the authorization (ownership) of the 5 BTC is transferred to Y.
Just as a notary does not need to see the actual vehicle but only needs to verify the paperwork, blockchain nodes do not handle the physical assets but ensure the digital transactions and authorizations are valid and secure. This analogy highlights the role of nodes in maintaining the integrity and security of blockchain transactions, ensuring that ownership and rights are accurately transferred without the need for a central authority.
The security of blockchain assets depends heavily on the proper management of private keys and the reliability of nodes. Users must ensure their private keys are stored securely and use trusted nodes for their transactions. Multi-signature wallets and hardware wallets are examples of enhanced security measures that protect private keys and prevent unauthorized access.
Nodes must also be secure and reliable, as they are responsible for validating transactions and maintaining the blockchain’s integrity. Users should trust nodes that have proven track records and robust security practices.
In blockchain technology, trust and authorization are pivotal concepts that underpin the entire system’s security and functionality. Understanding how these elements work can provide deeper insights into the blockchain’s operation and the safe management of digital assets.
Trust in blockchain is not about relying on a single entity but rather about trusting the decentralized network’s overall security and integrity. Users trust that the blockchain’s consensus mechanisms and the nodes’ operations are secure and reliable. This trust is built on the principles of cryptography, decentralization, and consensus protocols.
Nodes play a crucial role in establishing and maintaining trust within the blockchain network. Each node validates transactions and ensures they comply with the blockchain’s rules. Users rely on these nodes to execute transactions accurately and securely. When a transaction is made, it is broadcast to the network and verified by multiple nodes, ensuring that no single point of failure or fraud can compromise the system.
Authorization in blockchain is managed through the use of digital signatures, which are generated using private keys. When a user wants to perform a transaction, their wallet uses the private key to create a digital signature. This signature acts as proof that the transaction is authorized by the rightful owner of the asset. The transaction is then verified by the nodes, which check the validity of the signature and ensure that the user has sufficient assets to complete the transaction.
For instance, if a user wishes to send 5 BTC to another user, they sign the transaction with their private key. The signed transaction is broadcast to the network, where nodes verify the signature and check the user’s balance. If everything is in order, the transaction is added to the blockchain, and the ownership of the 5 BTC is transferred to the recipient.
Applications and services, such as exchanges and wallets, also play a significant role in the trust framework. These services act as intermediaries that manage users’ access to their blockchain assets. Users trust these applications to securely handle their private keys and perform transactions on their behalf. For example, when using a wallet to send or receive cryptocurrency, users rely on the application’s security measures to protect their private keys from being compromised.
However, it’s important to note that while these applications facilitate easier access to blockchain assets, the actual assets remain on the blockchain. The applications merely provide an interface for users to interact with their assets, emphasizing that trust in these services is about their ability to manage access rights securely.
To further enhance security and trust, some blockchain systems use multi-signature (multi-sig) wallets. Multi-signature (multi-sig) wallets require multiple private keys to authorize a transaction, adding an extra layer of security. For a transaction to be approved, it must be signed by a predefined number of private keys. This setup reduces the risk of unauthorized access because even if one private key is compromised, the transaction cannot proceed without the additional required signatures.
Consider a scenario where user X wants to send 5 BTC to user Y. User X uses their private key to sign the transaction, creating a digital signature. This transaction is then broadcast to the network, where it is verified by multiple nodes. These nodes check the validity of the signature and ensure that user X has the necessary funds. Once verified, the transaction is added to the blockchain, and the 5 BTC is transferred to user Y. Throughout this process, trust is placed in the nodes’ ability to verify the transaction and the application’s ability to manage the private key securely.
Self-custody and node security are critical components that provide users with control over their assets and ensure the network’s robustness. By understanding and implementing self-custody practices and securing nodes, users can significantly enhance their security and trust in blockchain transactions.
Self-custody refers to the practice of users managing their private keys themselves, rather than relying on third-party services to do so. This approach gives users full control over their blockchain assets and reduces the risk associated with trusting external entities. Here are some key aspects of self-custody:
Private Key Management: Users are responsible for generating, storing, and safeguarding their private keys. This can be done using hardware wallets, which store keys offline, or secure software solutions.
Avoiding Centralized Custodians: By maintaining their own private keys, users avoid the risks associated with centralized custodians, such as exchanges or online wallet services, which can be targets for hacking.
Enhanced Security: Self-custody minimizes the risk of losing assets due to third-party failures or breaches. Users are solely responsible for their security measures, including the use of strong passwords, hardware wallets, and secure backups.
Running a personal node is one of the most secure ways to interact with the blockchain. A node is a crucial part of the blockchain network, participating in transaction validation and maintaining a copy of the blockchain ledger. Here’s why running your own node is beneficial:
Full Control: Operating a node allows users to verify transactions independently without relying on external nodes. This ensures that all transactions adhere to the blockchain’s consensus rules.
Privacy: Using your own node enhances privacy, as transaction data does not need to pass through third-party nodes, reducing exposure to potential data leaks or tracking.
Network Contribution: Running a node contributes to the network’s decentralization and security, making the blockchain more robust and resilient to attacks.
Setting up a node involves several steps and considerations to ensure it operates securely:
Choosing the Right Hardware: Nodes require reliable hardware with sufficient storage, processing power, and internet bandwidth. This ensures they can handle the demands of maintaining a blockchain ledger.
Installing Node Software: Users need to install the appropriate blockchain client software, such as Bitcoin Core for Bitcoin or Geth for Ethereum. This software connects the hardware to the blockchain network.
Ensuring Security: Securing a node involves setting up firewalls, using secure connections (SSL/TLS), and regularly updating the node software to protect against vulnerabilities.
Backup and Redundancy: Regular backups of the node’s data and configuration are essential. This ensures that in case of hardware failure or corruption, the node can be quickly restored.
To illustrate, setting up a Bitcoin node involves the following steps:
Hardware Selection: Choose a computer with at least 2GB of RAM, 500GB of free disk space, and a reliable internet connection.
Download and Install Bitcoin Core: Bitcoin Core is the official Bitcoin client. Download it from the https://bitcoincore.org/en/download/.
Initial Setup: Run Bitcoin Core and follow the setup instructions. This includes specifying the data directory and allowing the client to download and synchronize the entire Bitcoin blockchain.
Configuration: Configure the node to enhance security and performance. This includes setting up port forwarding for peer-to-peer connections and enabling SSL/TLS for secure communication.
Regular Maintenance: Keep the software updated, monitor the node’s performance, and ensure backups are made regularly.
By running their own node, users can achieve maximum security and trust, ensuring that their interactions with the blockchain are both private and fully under their control.
Understanding the roles of wallets, nodes, and the intricacies of public and private keys is crucial for anyone involved in blockchain technology. Trust and authorization are fundamental to the operation of blockchain, ensuring secure and verified transactions without a central authority. By clarifying these concepts, users and virtual asset service providers can make informed decisions about managing their blockchain assets securely and effectively.
Self-custody and node security are essential practices for anyone serious about blockchain security. Managing private keys and running personal nodes provide the highest level of control and trust. This foundational knowledge is crucial for navigating the complexities of blockchain-based assets and transactions with confidence and security.
Below you can find more detailed explanations on the subject and take a look at the advantages and main risks.
A hot wallet is a wallet used to secure cryptocurrency while connected to the internet. It provides real-time transactions and easy accessibility, making it most suitable for active traders and frequent users. It typically takes the form of mobile applications, browser extensions, or exchange-hosted web wallets. Its primary risks are a high vulnerability to hacking and phishing attacks due to its constant internet connection. Furthermore, hot wallets generate and store the private key and seed phrase in an online environment.
Cold storage refers to storing cryptocurrency credentials using an offline method, ensuring that private keys are never exposed to online threats. This method is widely regarded as the most secure way to store digital assets, especially for long-term holding. Its advantages include enhanced security by avoiding online threats, immunity to exchange collapses, and being ideal for long-term investors. Examples of cold wallet types include hardware wallets, paper wallets, and air-gapped devices.
Cold wallets are generally considered more secure against online threats due to being offline. However, security does not depend solely on being offline. For example, a poorly managed cold wallet could be more vulnerable than a hot wallet secured with advanced Multi-Party Computation (MPC) and policy layers. Additionally, cold wallets carry the risk of loss or damage if the private keys are not properly backed up.
In custodial storage, a third party (e.g., an exchange, brokerage, or institutional custodian) holds and manages the private keys on behalf of the investor. In non-custodial storage, the investor retains full control of their private keys. This eliminates dependency on third-party services, providing complete sovereignty over crypto assets. The non-custodial approach is essential for decentralized finance (DeFi).
Crypto assets (coins, tokens) never leave the blockchain; they exist solely within the blockchain's ledger. Hot or cold wallets do not physically hold these assets. Instead, they manage the cryptographic keys and access rights that allow the user to interact with their assets on the blockchain. The balance shown in a wallet is merely a representation of the user's authorization to manage those assets.
Using a combination of both hot and cold storage methods (a hybrid approach) is generally ideal. This approach involves keeping a small amount of assets in a hot wallet for daily transactions and storing the majority of funds in cold storage for long-term security. This helps balance the convenience of accessibility with the robust security of cold storage.
Because cold wallets are offline, accessing funds requires extra steps, which makes them impractical for frequent trading. To complete a cryptocurrency transaction, the cold wallet must be connected to an online device, and the assets often need to be transferred to a hot wallet. Additionally, hardware wallets typically require an upfront investment (usually between $50 and $200).
MPC (Multi-Party Computation) wallets eliminate the traditional single-key model by splitting the private key into multiple shards (parts) held by different entities or machines. No single party ever holds the complete private key. MPC is considered the gold standard for high-volume and compliance-heavy operations because it provides cold wallet-level security without relying on physical isolation.
Understanding the intricacies of cold and hot wallets, private keys, node security, and transaction verification is crucial for safeguarding your blockchain assets. At Genesis Hukuk, we provide specialized legal expertise to help you navigate the complexities of blockchain technology, ensuring your digital assets are protected and your operations comply with evolving regulations.
Whether you're dealing with secure private key management, understanding the legal implications of node operations, or seeking advice on transaction verification, our team is equipped to offer comprehensive legal support.
Discover how our legal expertise can guide your journey in the digital transformation of promissory note tokenization, ensuring security and compliance.
Our Blockchain Legal Services Include:
Digital Asset Security & Compliance: Legal frameworks for securing your cold and hot wallets, private keys, and overall digital asset management.
Blockchain Project Legal Advisory: Guidance on the legal aspects of blockchain projects, ensuring compliance and mitigating risks associated with decentralized technologies.
Regulatory Compliance for Nodes: Expert advice on the legal obligations and best practices for operating and interacting with blockchain nodes.
Transaction Verification & Dispute Resolution: Legal assistance for verifying blockchain transactions and resolving any related disputes.
Empower your blockchain journey with the trusted legal partnership of Genesis Hukuk.
Genesis Hukuk – Your Legal Partner in the Blockchain.
