What are Hardware Wallets?
A hardware wallet, also known as a cold wallet, is a physical device created solely for offline storage of cryptocurrency private keys. Contrary to popular belief, the wallets do not store the actual cryptocurrencies.
Instead, they store the private keys since access to one’s keys is equivalent to accessing one’s crypto assets — they are always needed to sign transactions.
Hardware wallets guarantee that private keys to sign internal transactions never leave the device, protecting them from external dangers like viruses or hackers. As a result, they rank among the safer ways to store cryptocurrencies.
The devices are often small and portable, with some looking like USB drives or small plug-in devices.
Wallets can be bought from various companies such as Ledger, Trezor, Electrum, and others. However, all wallets need three fundamental components to store and secure private keys.
All wallets have a secure microcontroller that functions as the wallet’s “brains”. The microcontroller is responsible for signing transactions and maintaining and safeguarding private keys, among other crucial responsibilities. The private keys are kept safe on the secure microcontroller because it is shielded from the internet and built to withstand physical assault.
For the user to interact with the wallet, a display screen enables the owner to view information. In this case, the information entails displaying the wallet’s current balance, transaction information, and instructions for the user to follow.
Lastly, wallets also contain input buttons for users to choose options and browse the device’s menu. Typically, these buttons are used with the display screen to enable seamless device use.
How Can A Wallet Prevent Crypto Hacks?
As mentioned earlier, private keys kept on an online wallet are susceptible to network-based theft, which is the nature of most crypto hacks in the sector. With a hot wallet, a single device online performs all the steps necessary to finish a transaction.
A hardware wallet creates and stores private keys, digitally signs transactions using those keys, and broadcasts the signed transaction to the network.
To safeguard the private keys, wallets store them offline and sign offline transactions. Hardware wallets do not communicate with other electronic devices unless they have been physically plugged into the device, which only happens when the owner is accessing their private keys.
In the case of wallets, any online transaction is first temporarily transferred to an offline wallet stored either on a USB drive, hard drive, paper, or offline computer. It is digitally signed there before being sent back to the online network.
Therefore, even if an online hacker came across the transaction, they would not be able to access the private key used for it because the private key does not come into contact with a server connected online during the signing process.
Despite being more secure, transferring funds to and from a hardware wallet device is slightly more complicated than a hot wallet.
Benefits of Hardware Wallets
- Security: Wallets provide additional security for your private keys by storing them offline, making them less susceptible to hacking and online attacks. Most hardware wallets also include extra security features like a PIN or biometric authentication to better safeguard your digital assets. Even if the physical device is stolen, without the PIN or biometric authentication, your assets cannot be retrieved using another device’s recovery key.
- Options for Recovery: If your device is lost, stolen, or destroyed, you can retrieve your private keys and digital assets with the majority of backup and recovery features offered by wallets. Most wallet options provide a unique recovery key, also known as seed phrase, out of 24 randomly chosen words, so even if the physical wallet is ever broken, stolen, or lost, the assets can still be recovered using the unique key, which is entered into another hardware device.
- Compatibility: Wallets are a flexible alternative for people investing in various digital assets because they can handle several cryptocurrencies. Also, most of the best wallets can be linked to additional wallet interfaces, including MetaMask, enabling communication with DeFi and NFT systems.
Drawbacks of Hardware Wallets
Despite offering higher security for valuable digital assets, wallets have challenges and disadvantages that make them difficult to work with. These include:
Wallets are expensive. Some wallets cost over $100, making them more costly than software wallets. For some users, especially novices or those with smaller portfolios, the cost may be exorbitant even though the extra protection and peace of mind may be worth the price.
- Ease of Use
Even though they are typically simple to use, hardware wallets can be more complex to operate and less convenient than software wallets. In most cases, setting up the wallet the first time can be cumbersome, especially for beginners.
Additionally, suppose you need to conduct transactions frequently, such as daily. In that case, wallets are a troublesome option due to the need to physically connect the device to your computer or smartphone every time.
As such, they are more suitable for investors and users looking to hold on to their assets rather than trade them often.
- Limited Recovery Options
Although most hardware wallets provide backup and recovery features, these features may be insufficient or useless in some circumstances. For instance, you might be unable to retrieve your digital assets if you lose your wallet and your backup seed phrase.
Therefore, you must keep your recovery key in a safe place.
Tips For Using Safely
- Purchase from a Reliable Source: It’s important to purchase a hardware wallet from an authorized and reputable manufacturer or distributor. Avoid making purchases from unreliable online marketplaces or third-party sellers who may be selling counterfeit or modified devices. By purchasing verified devices, one avoids devices with viruses and malicious bots that could lead to the loss of one’s assets.
- Create a Secure PIN: Your wallet’s PIN is an essential security line against illegal access. It’s crucial to pick a PIN that is both secure and distinctive, avoiding combinations that are simple to figure out, such as birth dates or regular patterns. Your PIN should ideally consist of a string of numbers you can remember, but that isn’t easy to decipher for someone who already knows your personal information. This ensures your money is safe even if your wallet is in the wrong hands.
- Protect Your Seed Word: Another crucial part of one’s wallet is the seed phrase, often consisting of a string of words. If the hardware device is damaged, lost, or stolen, the seed phrase is mostly the only source of recovery. Therefore, you must store your seed phrase in a safe, offline location and guard it carefully. This includes avoiding cloud-based or digital storage options since they may be vulnerable to cyberattacks. One could consider employing an offline vault or a fireproof, waterproof container for additional physical security.
- Consistent Firmware Updates: A key component of preserving the security of your wallet is keeping the firmware up to date. Firmware updates from manufacturers frequently come with significant security improvements and bug fixes. Failure to upgrade the firmware on your wallet makes it susceptible to new attacks. It is, therefore, necessary to routinely check for and install firmware upgrades via the manufacturer’s official website or app.
- Use Secure Devices: When signing transactions, ensure the computer or mobile device is secure and devoid of viruses or malicious software before connecting your wallet. Avoid connecting to insecure or public devices since they could expose your wallet to risks.
To secure the devices, one could use reputable operating systems and frequently updated antivirus software to reduce the possibility of malware that could compromise your hardware wallet.
Also, before installing, make sure the wallet’s official program or app is legitimate and from the wallet’s manufacturer.