Hello Ravi
These terms are used to refer to the ways in which ISPs handle transient traffic. It describes how traffic is handed off from one ISP to another. In this context, we’re not talking about your local ISP that provides you with connectivity, but those ISPs (Tier 1 and Tier 2) that handle backbone Internet traffic. For more info on the Tier architecture of the Internet, take a look at this post:
Remember that these ISPs have multiple connections to other ISPs at various areas within their networks. When a packet is received, and it must be handed off to another ISP, it can be handed off at one of many different connection points.
Hot potato routing is the practice where ISP A will take a packet and route it to the closest available exit point of its own network to ISP B (or C, or D, or …), even if that is not the most efficient way to route it. In such a case, ISP A is essentially relieved of any further responsibility to the packet, and it is now “ISP B’s problem”. This policy is the most common that can be seen in networks, and is based on the peering agreements between ISP A and ISP B (and other ISPs). ISPs will keep track of the traffic ratio (the ratio of traffic flowing in one direction to that flowing in the other direction between peers), and if it is fairly even, then hot potato routing is acceptable and fair, because the ISPs will evenly share the burden of such exchanged traffic.
Cold potato routing is the (more expensive) practice of keeping traffic within an ISPs network for a larger part of the journey, by routing the traffic to the exit point from the ISP’s network that is closest to the final destination. This allows ISPs to provide higher quality network services to their customers. Content providers prefer the use of ISPs that offer cold potato routing because their payloads and the quality of the services they provide depend upon the timely delivery of traffic.
I hope this has been helpful!
Laz