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Coinbase Custody had announced that they are storing institutional investors' funds in a cold storage while only exposing Coinbase's own funds for bonds. I'm trying to understand how they are executing this, but I'm not specific to Coinbase's implementation.

As I understand, the way Tezos works is that we need to have a hot TZ account that is a manager account to a KT1 account. So the act of creating the KT1 account and transferring the funds there to delegate, the funds cannot technically be in cold storage?

Is Coinbase not truly using a cold storage or is there a way to create a true cold storage while delegating? Or maybe do we call using a hardware wallet like Ledger or Trezor as "cold storage".

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  • 1) The manager need not be the originator. The manager key need not even be revealed. Only when you want to spend from the KT1 will you need the manager's secret key. So the import of the second paragraph is not clear to me. 2) What exactly do you mean by "true" cold storage?
    – Tom
    Mar 29 '19 at 17:56
  • Maybe my definition is flawed but I assumed cold storage is that the secret key has never been exposed online(aka I generate my key offline and the machine that was used will never touch the internet).
    – Frank
    Mar 29 '19 at 19:51
  • I was requesting that you explain in the question, since it seemed essential for understanding the question "is there a way to create a true cold storage while delegating". I'm still not sure what you meant, exactly: does transfer of information (public keys and signatures) from offline to online systems, e.g. via eyeballs and keyboards, or QR codes and cameras, count as "touching the internet"? Anyway, I guess such things are off-topic?
    – Tom
    Mar 29 '19 at 20:18
  • I'm on the same page. I'm also trying to find the best way to ask my question to be StackExchange useful. I think your original comment about originator and manager is a key part, as that would allow someone to create an address completely offline and still be the manager. I would take that an answer and if you want to edit the question to fit the intent of the answer, I think there is valuable information there.
    – Frank
    Mar 29 '19 at 21:27
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There is no need to keep the TZ account "hot" (as in online) while delegating. LPOS allows you to select a delegate and then keep your keys in "cold storage" (as in offline).

The baker however - Coinbase in this case - needs to constantly sign blocks and endorsements and hence needs to keep the keys to their own funds available for signing.

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