How to choose your wallet: custodian, multisignature, and HD

Eidoo Safety

When you have to choose on which wallet to store your digital currencies, you should ask yourself what kind of platform is the safest and which one fits best with your needs.

When we talk about money, in fact, the first thing you should aim at is safety, because nobody wants to have its money stolen, of course.

Choose wallet: HD or custodian?

There are two different main types of wallets:

  • Custodian;
  • Multisignature;
  • Hierarchical deterministic

Custodian wallets

The first thing to do when you need to choose a wallet is thinking about security, your level of knowledge, and privacy.

Custodian are wallets where another person or company at least partially control the private keys for your cryptocurrencies wallet.

This means you don’t fully control your funds because you cannot manage your private keys.

A few of these acts like a bank-like deposit account, so you can only have an IOU for your digital currencies in storage on this kind of platforms. As a consequence there is no guarantee about the actual backing of your “virtual” cryptocurrencies with real ones.

Multisignature wallets

Other platforms, instead, decide to divide the control of a wallet using a multisignature system. This means that the company holds one or more keys needed to create a valid transaction.

The advantage of multisig is that the service generally cannot steal your crypto without your consent, but web-based multisig implementations have a risk profile than properly backed-up private wallets.

However, using these non-custodial wallets mean that you need to take full responsibility for your education and best practices because, if you lose your password or private keys, the company cannot help you to recover them.

HD non-custodian wallets

Hierarchical deterministic (HD) wallets are described in BIP 32 standard, and its seed is a random 128-bit value presented to the user as a 12-word set using several languages (the most common is English, of course).

Through this standard algorithm, this 12-word set leads to the creation of the private keys you need to secure your wallet.

This avoids the necessity for a backup after every single transaction because 100 keys are cached in a pool of reserve keys.

So, you will need only to backup by copying this 12-word set on several different sheets of paper in the exact order they were generated.

You have full responsibility

HD wallets represent the strongest security system compared to custodial services or wallets that use a simple password.

But, we at Eidoo are receiving some support requests related to the fact that you are not sure about our security system and how the backup works.

So, how safe are HD wallets? The answer depends mostly on how you manage your wallet. In fact, every wallet contains a set of private keys without which the owner cannot have access to funds. The biggest danger in security is you perhaps losing the private key or having the private key stolen. Without the private key, you will never see your cryptocurrencies again.

Read here our Eidoo guide about private keys.

Eidoo Security System

First of all, we need to say that the when you download the Eidoo wallet for the first time — both on Android or iOS — the system forces you to write your 12-word set for the backup, and advise you that if you lose your password or the backup phrase you will not be able to recover them again, as you can see in the images below:

This is a security worldwide standard for digital currencies wallets, and you need to be sure to know their risks and opportunities:

  • Opportunities: no one can enter in your wallet and move your funds because your private keys are stored on your device only. You are the only one who knows your password and backup phrase, so if you store them properly you have the chance to have the safest wallet ever;
  • Risks: if you didn’t backup your wallet by saving your 12-word set no one can recover neither the password or the backup phrase.

So, you have to be sure that you understand how this system works because you will lose your funds if you don’t remember and store your 12-word set properly.

As we said, this is a worldwide security standard for HD wallets, and we choose this method as we believe this is the safest, even if 100% “safety” cannot be guaranteed, following best practices and high security standards helps.