Today’s topic is hardware wallets.
But we need to understand how every Bitcoin wallet functions in general before we dive deeply into hardware wallets. A bit deceptive is the word Bitcoin wallet, as a Bitcoin wallet does not actually contain any Bitcoin. Technically speaking, a Bitcoin wallet is a password keeping software that is often referred to as keys in cryptographic terms.
These keys grant your wallet access to the Bitcoins allocated to it on the blockchain called the Bitcoin transaction ledger. So, when you use any Bitcoin wallet, there are two essential words you can encounter. The first is a Bitcoin address, which is what you send in Bitcoin, sort of like an email address, to people who want to pay you.
The second is a key that is confidential. The private key helps you to access the Bitcoins that you own and manage them. You may think of your private key as the password to your email account in our email account analogy. Aside from holding your private key, the wallet also uses your private key to sign Bitcoin transactions on your behalf and broadcast them to the Bitcoin network.
Let me explain:
If you want to transfer Bitcoins to anyone else, you need to show the entire network's ownership of those Bitcoins so that it can consent to alter the transaction ledger. Your Bitcoin wallet takes your requested transaction to accomplish this, signs it in your name using your private key and transmits this digital signature to the network.
In a nutshell, without having to reveal it, a digital signature is a way to show you own a certain private key. It is achieved by using complicated mathematical principles known as cryptography. This whole process is sort of similar to signing a check authorizing your account to move money. When a transaction has been signed, the wallet then transmits it to the entire network..
This transaction will finally be entered on to the blockchain by Bitcoin miners, and the transaction will be considered full. So, what does this all have to do with wallets for hardware? If my wallet is just a piece of software, why can't I, like any other software I use, just have it on my computer? Ok, as you already know, stealing a piece of computer information isn't that kind of thing.
And if malware infects the machine running your Bitcoin wallet, it can expose bad actors to your private key. Hackers can be able to take control of your computer or see on your screen what is displayed. And once your private key is revealed, you will no longer have your Bitcoins under your thumb. They could be moved conveniently to anywhere that the hacker chooses. To stop this situation,
First -
You should make sure that your machine is totally free from malware. Although this may sound obvious, most viruses are either disguised as legitimate software or have a way to prevent antivirus software from detecting them. The other choice would be to use a wallet that is "immune" to malware to keep your private key secure, so to speak.
This is exactly what wallets are supposed to do with hardware. Simply put, hardware wallets are computers that, except for a small screen, a button or two and the basic operation of storing keys and signing transactions, have been stripped down of all logic. Hardware wallets look like small USB devices, and they have a minimalist security approach.
This is based on the logic that the more sophisticated a system is, the more it needs to be compromised by hackers with opportunities. The computer is so "dumb" in the case of hardware wallets, it is virtually impossible to hack or corrupt it with anything. Hardware wallets can't connect to the Internet or run complicated apps because of that basic nature.
They are just a form of offline storage of your private key. Unlike devices that connect to the Internet, which are called 'hot wallets', this method is known as cold storage. So, how exactly do hardware wallets operate? Ok, let's assume that you want to use a hardware wallet to submit a Bitcoin transaction. The first thing to note is that, since a hardware wallet is such a basic system that can only sign transactions, for all other tasks, such as preparing the transaction and transmitting it to the network, it needs to use a more sophisticated computer.
But you'll need to connect it to your personal computer and download a program that can work with it in order to use a hardware wallet. We'll call this a bridge program. The bridge will allow you to prepare for the signing of your transaction. The hardware wallet allows only very specific types of data, such as crypto-currency transactions, to pass through it.
It signs something before the bridge program on the hardware wallet itself receives a transaction, and then sends it back to the bridge program. Your private key never leaves a pocket for the hardware. The unsigned and signed transaction is the only thing that gets passed between your device and the hardware wallet. A hardware wallet can be used with any device without fear of being hacked or infected due to its minimalistic and simplistic nature - even a public library computer or your mom's laptop:))
The only thing you'll need to do to make sure your Bitcoins are protected is to make sure that perhaps the transaction you approve on the screen of a hardware wallet matches the transaction displayed on your personal computer by your bridge software. There are over a dozen companies on the market today that sell hardware wallets, with Ledger, TREZOR and Keep Key being the three market leaders.
Each business offers various models with various characteristics. There's a link in the overview below if you want to read more about the different models on our web. Among the numerous hardware wallets, there are several features to compare. Apart from company reputation, some things to be considered include how many different coins the system can support, and whether you can monitor it both from your cell phone and from your computer.
It is pretty easy to set up a hardware wallet. The primary thing to do is write down when initializing the system the collection of words you will be given. These terms are a way to restore any private key created by your hardware wallet, also known as a seed phrase or mnemonic phrase. This also means that your Bitcoin will also influence whoever might get a hold of these words, so it's important to keep your seed phrase written offline and in a safe location.
I want to go through some common hardware wallet risks that you should be aware of, and how to avoid them where possible, before we conclude today's episode. The first danger is that when your system is on its way to your home for the first time, someone may tamper with it. To stop this, a special holographic sticker is used by all reputable hardware wallet manufacturers to show the wallet was never opened.
Don't use the wallet if you get a wallet and this sticker isn't in tact. When initializing, while some wallets even run a self-tampering test, it is best to remain on the safe side. Buy a hardware wallet directly from the manufacturer's website to mitigate this risk even further. If you want to buy from a reseller, first contact the manufacturer to make sure he's a registered, trustworthy reseller. The fact that your seed phrase should be created randomly by your wallet upon setup and is not sent to you with the computer is closely related to this problem.
There's a good reason to take seriously all these protection steps. For instance, one unfortunate user bought a hardware wallet on Amazon from a bad actor and received a wallet with a preconfigured seed phrase containing a card. Using this existing seed word, he was told to initiate the unit.
The consumer was not quite tech savvy and did as he was told to do, only to find out that they were easily deleted by the hacker who had knowledge of the pre-configured seed once he deposited coins into that hardware wallet. Another danger to be aware of is that your hardware wallet computer, also known as the evil maid attack, could be stolen or physically accessed by unwanted people.
Most, if not all, of today's hardware wallets have PIN protection. But it will take the thief a while before he can access your coins, even though your computer is stolen. You can immediately use your seed phrase to retrieve your Bitcoins and send them to a new wallet with a different seed phrase once you find your computer being stolen.
This will effectively drain all of your funds from your stolen wallet and allow you to maintain secure control over your Bitcoins. The "$5 wrench attack" is another very rare yet likely attack. If you don't hand your hardware wallet over and unlock it with your PIN code, this applies to when someone physically tries to harm you with a $5 wrench.
Some wallets, such as TREZOR, allow you to add another layer of security, called a passphrase, to defend against these types of physical attacks. This means that after the PIN code, you'll be asked to add an additional passphrase. You can set it up, however, so that only those accounts will be seen on your wallet with different passphrases. So imagine having a dummy account with only a tiny sum of coins in your pocket and a real account with most of your funds.
You will use the dummy passphrase when someone forces you to open your wallet and it will appear that the wallet only contains a small amount of coins, not exposing your full holdings. Is what happens if the wallet manufacturer goes out of business a very common concern people generally express about hardware wallets?
Well, in most hardware wallets today, the seed phrase technology used is compatible with several wallets: not exclusive to any particular business. Therefore, if a certain business goes out of business, you can use your seed phrase to retrieve your Bitcoins directly to the wallet of another company.
Your seed phrase has a lot of strength, as you probably realize by now, and it can be used in many situations to recover your Bitcoins, even if your hardware wallet breaks or gets hurt. Well, that's it for today's Crypto Whiteboard Tuesday episode.
Hopefully you know what a hardware wallet is now - a tiny device that stores your private keys and signs offline transactions to keep your Bitcoins safe.
Enjoy....