Hardware Wallets: Basic Concepts
Hardware wallets play a crucial role in securing your Bitcoin by allowing you to physically possess and control your private keys.
What is a hardware wallet?
Bitcoin hardware wallets are physical devices specifically designed to securely store the private keys required to access your bitcoin on the blockchain. These private keys are lengthy character strings that enable access to the bitcoin funds at a given address. It is not recommended for individuals to memorize these long strings of characters, so they must be stored in a safe location.
Hardware wallets offer the highest level of security for storing private keys as they are not connected to the internet. This significantly reduces the risk of a potential hacker gaining access to them. Additionally, these hardware wallets are usually encrypted, which means that if you misplace your wallet, the keys stored within it cannot be accessed by anyone who finds it.
Wallet providers typically guide users through the process of creating a recovery option, referred to as a seed phrase, which enables them to regenerate the private key stored in the wallet in the event of a loss.
Typically, a hardware wallet secures the private key stored on the device with a PIN and at least one secure element. These devices generally have minimal memory to prevent malicious actors from injecting malware into them.
What doesn’t a hardware wallet do?
It is a common misconception that hardware wallets store actual bitcoin within the device. However, this is not true. No bitcoin wallet, whether it is software or hardware, holds bitcoin within it. Instead, all bitcoin remains on the blockchain, and hardware wallets only store the keys required to access it.
The misunderstanding surrounding this topic is so prevalent that some within the bitcoin industry suggest avoiding the term “hardware wallet” altogether and instead using more precise terms such as “signing device” or “signer.” Additionally, a hardware wallet cannot verify bitcoin balances on the blockchain or transmit and authenticate bitcoin transactions. These functions require separate bitcoin wallet software, as all bitcoin wallets must connect to bitcoin nodes to receive, transmit, and validate new transactions.
What does a hardware wallet do?
Hardware wallets are capable of performing several functions required for managing bitcoin, such as receiving, securing, and spending it. Upon initial setup, hardware wallets that utilize BIP39 standards create a seed that acts as the basis for establishing a bitcoin wallet. This seed is used to generate addresses for receiving bitcoin on the blockchain. Once bitcoin is received, the hardware wallet can authorize transactions by signing them to enable spending. Furthermore, a hardware wallet can restore a previously established bitcoin wallet by utilizing a backup seed phrase.
Reasons to use a bitcoin hardware wallet
As the value of your bitcoin increases, the importance of secure key storage also increases. One solution for this is a hardware wallet, a physical device that securely stores the keys to your bitcoin. However, there are other options for storing keys, such as software wallets, paper wallets, and brain wallets. Why choose a hardware wallet specifically?
- Keep your keys offline
2. Protect against physical attacks
3. Smaller attack surface
4. Generate your own entropy
5. Confirm addresses on-device
6. Enhance your travel safety
In this article you can read the details about each reason to use a hardware wallet:
The Firmware
The firmware on a hardware wallet is responsible for managing your keys, registering addresses, and executing transactions on the blockchain. The process of executing transactions on the blockchain can be complex, but the firmware on the device handles it.
In certain cases, the device is shipped without firmware to ensure that you use the most recent firmware version. Additionally, the device uses to verify the firmware each time it starts to confirm that it hasn’t been corrupted. As a precaution, it’s essential to follow the manufacturer’s instructions carefully.
The Secure Element
A secure element is a microprocessor chip designed to store and process sensitive information. It is found in devices such as credit cards and SIM cards. In the context of bitcoin, a secure element is used in hardware wallets to store seed phrases and private keys, providing added protection against physical attacks. While there may be some downsides to using a secure element, it is generally considered a useful way to add an extra layer of security to protect devices from various types of attacks. You can read more about the secure element in this article:
Main Functions
Generating a Seed
During the setup process, most hardware wallets will generate a seed for the user. The seed is a long and randomly generated string of binary digits which can be represented as a seed phrase, usually a list of 12 to 24 words, which is provided to the user. It is crucial that the user writes down the seed phrase in the correct order and stores it in a secure offline location, as it is the only way to recover the wallet if the device is lost or damaged.
These words must never be stored online, and you should never take a photograph of them because, with them, a hacker can gain full access to your wallet.
Here you can learn some good practices to safely store your Hardware Wallet Seed Phrase:
The seed phrase used in bitcoin wallets should not be mistaken for the private key of a bitcoin address. Instead, it acts as the input for deriving the master private key, which is then used to generate all addresses and their corresponding private and public keys for the wallet. With modern deterministic wallets, a single seed phrase can produce numerous bitcoin addresses, each with its own private and public key pair.
Hardware wallets generate seed phrases by creating a seed, which is then translated into a list of 2,048 words. Various techniques are employed to ensure randomness, such as the usage of random number generators (RNGs). In many hardware wallets, the RNG firmware is executed on an isolated microprocessor known as a secure element, which is embedded in the physical hardware wallet. Other wallets use a combination of internal and external sources to generate entropy, and rolling dice is a common example of the latter.
Storing Private Keys
During initialization, the private key is generated and saved inside the hardware wallet. If a secure element is present, the private key is usually kept within it and cannot be exported as plain text. This is a crucial security measure of hardware wallets, as it makes it difficult for unauthorized parties to access the private key. Hardware wallets are considered a form of “cold storage” because they save the private key in an isolated environment, which is not connected to the internet. A hardware wallet’s limited accessibility means that, in theory, it can safeguard the private key even if it is connected to a computer infected with a virus (though this is not advisable).
Signing transactions
Hardware wallets have the primary function of securely authorizing transactions by signing them. When using a single-signature wallet, a signature from a single hardware wallet is sufficient to authorize a bitcoin transfer. In contrast, multi-signature wallets typically require two or more signatures from separate hardware wallets to approve a transaction.
To sign transactions, hardware wallets need to communicate with wallet software on a computer or smartphone. Depending on the model, hardware wallets may use USB, Bluetooth, NFC, or other connection methods. Some hardware wallets are air-gapped, which means they use a camera, QR codes, or SD cards to transfer data between the hardware wallet and the device. Despite being connected to the internet, the seed, public and private keys are protected and isolated because they are stored within the hardware wallet and not on the device.
Recovering wallets
In the event of a lost, stolen, damaged, or malfunctioning hardware wallet, there are ways to recover access to the funds. One such method involves using the seed phrase to restore the wallet to a new hardware wallet. When setting up the new hardware wallet, the user is given the option to either create a new wallet or recover an existing one. If the user selects the latter option, they can input the seed phrase from the previous wallet, which will enable them to regain access to the funds.
Verifiying addresses
Hardware wallets provide a crucial feature that helps users avoid losing their bitcoin due to accidental mistakes. Since bitcoin transactions are irreversible, it is important to verify the recipient’s address before sending funds. Hardware wallets offer a verification process that allows the user to confirm the address on the device, minimizing the risk of errors or fraud. In addition, multisig wallets indicate the number of signatures required to authorize a transaction, which prevents unauthorized access by attackers who may have added their own keys. By implementing these features, hardware wallets provide an added layer of security and peace of mind for bitcoin users.
Where to buy them?
Choosing a trustworthy hardware wallet model is essential, especially if you intend to protect a significant portion of your assets. It is not advisable to rely on used or secondhand devices. Instead, it is recommended that you purchase new devices directly from the manufacturers themselves.
While all wallets have a similar function, there are variations in the level of security they provide, the ease of use of their software, and their price point relative to their features and capabilities.
This website compares feature by feature, the best different Hardware Wallets available in the market right now:
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