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Does anybody know how cold is the Coinbase cold storage?
I'm not really into Coinbase but when I read about their cold storage I become a little bit skeptical: for example, how do they process withdrawals in a cold storage system?
And what does this mean?
Up to 97% of customer funds are stored offline.
Do they store X BTC in Y wallets, and then store private keys in a cold storage (shouldn't this approach make several transaction fees pop out when withdrawing)?
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Well for one it doesn't really matter because your bitcoins are intermingled with everyone eleses in cold storage. In other words, your account does not "own" private keys. Rather everyone's bitcoins are swept into Coinbases' addresses. They keep track of who owns what using internal accounting methods.
When you send money from your Coinbase account, Coinbase first has to send money to some wallet address 'owned' by you. So they send bitcoins from their hot wallet to your coinbase wallet, then a second transaction is issued from your wallet (spending the outputs just received) to the final destination.
As to how they manage and replenish their hot wallets, I'm not sure, but perhaps they don't have to do this too often if more bitcoins are entering Coinbase than leaving.
If BTCs are swept into CB's addresses and then records are kept in a db, doesn't this raise bigger security issues? If you can found & hack the db, you can steal from it and they could potentially never know about the breach until they run out of funds. – XCore – 2014-07-07T21:30:50.160
Right, that might be true. I don't know what protections they have against this. I didn't mean to imply what they were doing was safe. I wonder though, what stops someone from doing the same thing to Bank of America? Hacking the db to increase the funds associated with an account. How are those records maintained anyway? – Fraggle – 2014-07-08T10:52:42.080
1Most exchanges and web services are based on this same "shared web wallet" principle. Basically you are trusting the service provider and you are taking the risk if they fiddle with accounts or not. – Mikko Ohtamaa – 2014-08-06T22:48:08.997