Cryptonomics: Hardware Wallets Explained

If you own crypto assets, then perhaps the safest bet is safekeeping them in cold storage or hardware wallets

By
Abriks
on
February 3, 2021
Category:
Cryptonomics

Introduction

Almost everyone is familiar with the traditional meaning of a wallet. In the world of fiat, it is an indispensable accessory in which the carrier puts physical money for safekeeping and easy retrieval. Cryptocurrencies, like fiat or cash, are valuable to the owners and require a place to keep them safe. However, unlike physical cash, cryptos exist in digital form (that is, on the blockchain) and can only be kept in a digital environment. It is also necessary to point out that while cash is kept in physical wallets, cryptocurrencies are technically not stored in wallets; instead, it is the keys (public addresses and private keys) that prove ownership of the assets. The term wallet was adopted based on the traditional use case of storing fiat in wallets. 

Crypto wallets are generally classified into two broad categories, Hot wallets and Cold wallets, each having various levels of safety. 

Hot Wallets:

These are crypto wallets that have a constant connection to the internet. They are usually easy to use, which makes them attractive to many people. Since they are connected to an external source, they are also very vulnerable to being hacked because of their active internet connection. Though many hot wallets have implemented extra security measures such as two-factor authentication (2FA) to minimize the risk of hacking, the vulnerability is still present and can be exploited by rogue elements. Typical examples of hot wallets are mobile phone wallet applications and crypto exchange wallets. 

Cold Wallets:

These are wallets that are completely offline with no connection to the internet. They are a safer alternative to hot wallets because they are not susceptible to hacks. A paper wallet is an excellent example of a cold wallet. 

What is a Hardware Wallet, and why do you need one?

A hardware wallet is an electronic storage device in which a user's private keys/public addresses are saved in an encrypted part of a microchip. It is a unique blend of hot and cold wallets as it provides the safety of cold wallets and affords the ease of transaction of hot wallets. The central concept behind hardware wallets is to reduce a blockchain user's exposure to online threats by keeping one's private keys off the internet. 

Unfortunately, in the crypto-space, a large stream of hackers frequently on the lookout for potential victims to prey on; a hardware wallet represents one of the safest ways of storing your crypto-assets. While it is difficult to say that any particular system is fool-proof, there are no known incidents where a hardware wallet was compromised via an internet hack, and crypto assets were stolen. 

Typical Flow Process of a Hardware Wallet Transaction.

Regardless of the brand of hardware wallets, carrying out a transaction with them follows the process enumerated thus, 

1. Connect the wallet to a computer or similar networked device. 

2. Unlock the wallet with your PIN.

3. Generate your public address 

4. Create the desired transaction 

5. Confirm the details of the transaction on the wallet's screen, then approve or otherwise. 

6. Unplug your wallet and keep in a safe place.

Throughout this process, the private key never leaves the wallet; instead, all interactions occur in the wallet's hardware.

Evolution of the Hardware Wallet

In the early days of blockchain after Bitcoin was created, there was not much interest in developing consumer wallets because crypto didn't have much value, and those in it then could afford to look away if they lost access to them. 

The sentiments took a different turn in 2014 when the value of 1 Bitcoin shot up to $1,000, and people started thinking seriously about how to preserve this new digital source of wealth. Coincidentally, it was in 2014 that hardware wallets became available on the market with Trezor, Goochain Citadelle, Ledger etc, releasing their products. Since then, hardware wallets have seen a progressive enhancement of its features as interest in blockchain adoption grew. Here's an overview of the brands of hardware wallets available in today's market and their features

Pros and Cons of Hardware Wallets

Though hardware wallets currently represent the safest way of storing cryptos, it is necessary to add that its total safety depends on a couple of factors that have to be upheld. Some pros and cons in the use of hardware wallets are:

Pros:

1. They are very secure. They protect you from online hacks. 

2. They usually come in small portable sizes, which make them convenient to carry about. 

3. It can keep your crypto assets from different blockchains all on one device. 

Cons:

1. Absolute safety depends on the user. A wallet is a small device and can easily be misplaced. Every hardware wallet has a recovery phrase – which regenerates the private key. If the user misplaces his recovery phrase by any chance, the funds in the wallet are lost forever.

2. Hackers can use malware to switch a user's intended recipient address of a transaction with an address owned by the hacker. Some hardware wallet manufacturers have tried to bypass this possibility by implementing multi-factor authentication on the wallets. 

3. Hardware Wallets do not make their owner immune to "$5 wrench attack". This is an attack where a thief infers that his victim has a lot of valuable cryptos and threatens physical harm or death if those assets are not handed over to him. More on $5 wrench attack can be found here 

4. The possibility of manufacturing imperfections can not be ruled out with any product. If this is present in a hardware wallet, it can be a loophole that someone skilled in the art can exploit. Always source your hardware wallets from credible manufacturers.

Ending Notes 

Due to blockchain transactions' general anonymous nature, it is challenging to trace and recover assets if they get into the wrong hands. If you own crypto assets, then perhaps the safest bet is safekeeping them in cold storage or hardware wallets. To ensure optimal safety of your assets, buy your hardware wallet from reputable manufacturers, enable multi-factor authentication, keep your recovery phrase in a location known only to you, take every common-sense precaution. You'll have much fewer hassles to bother concerning the safety of your blockchain assets.


Tags:
No items found.
Abriks

Ahamdi Abarikwu is an Electrical Engineer and a lover of anything crypto. He is also an avid writer, proofreader and editor. He loves to play Scrabble in his spare time.