Hardware Wallets: Secure Your Crypto: Is the Current Generation of Hardware Wallets Enough?

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Wallets are at the heart of the Web3 world since all activity on DApps is forever tied to the wallet address. Since cryptocurrencies and NFTs are tied to wallets, mining wallet information has become a common practice among hackers and scammers within the Web3. Often one would hear about a seed phrase compromise through phishing or losing the wallet due to losing a device or forgetting a password.

To drive Web3 adoption, wallet technology and security will also need to evolve. Since the FTX debacle, the concept of self-custody has become the talk of the industry, prompting more people to transfer funds from centralized services to wallets, especially hardware wallets. So why do individuals choose hardware wallets, and are hardware wallets the safest option?

What makes hardware wallets secure? Hardware wallets are physical devices responsible for securely storing and managing the private key, which provides access to all your cryptocurrencies and NFTs. The wallet’s private key can be thought of as an account password that would grant immediate access and control over the cryptocurrencies associated with the wallet. Hardware wallets are preferred mainly because these devices are not connected to the internet. Not being an internet-connected device reduces potential attacks that could occur online. As mentioned earlier, private keys are essential for controlling your cryptocurrencies and NFTs.

With hardware wallets, during the initial setup of the wallet, the wallet’s private key is created in the device itself. Since private key generation and storage occurs offline, users are protected against any sniffer attack that could potentially compromise a mobile or computer.

Additionally, hardware wallets serve a bit like a two-factor authentication mechanism when you make transactions. The usual transaction flow requires the user to verify the address of the sent assets. Since the computer is an internet-connected device, it can fall victim to attacks such as clipboard attack or screen spoofing where wrong information is displayed on your screen.

In this attack, the information that is copied to the computer or mobile is replaced with malicious information in the case of a transaction, the address of the attacker. Hardware wallets usually interface with a mobile or desktop application and have a screen where the precise information of the destination address can be verified. This way, before sending an asset, users can verify the true destination of where they will be sending funds and avoid loss and theft.

What are the current challenges with hardware wallets? Even though hardware wallets tend to be the most secure option for your cryptocurrencies and NFTs, they are not perfect. Today, most hardware wallets tend to protect the wallet’s private key by storing it on a proprietary chip inside the device, called a secure element.

Secure elements typically require NDAs to be signed in the company’s name, thus forcing companies to be shut down. Being closed-source puts the responsibility on the company to maintain security and could lead to potential backdoors that attackers could exploit and compromise hardware wallets. As web3 grows, open source technology will drive innovation further as information becomes publicly verifiable and reproducible.

Today’s wallets, regardless of software or hardware, use a seed phrase recovery system to recover funds in the event of loss of access to the device associated with the wallet. A seed phrase is a human-readable representation of the wallet’s private key.

Private keys tend to be difficult to remember or save because they tend to be long strings of alphanumeric characters. Therefore, seed phrases have been introduced to represent the private key in an easier to understand format. Keyphrases tend to be 12/18/24 words long and are a combination chosen from a list of 2048 words, described in BIP39.

Here is an example of a 12-word seed sentence: Cat country fluid flush pioneer poem rally drum emotion series sign warn

These words will tend to represent the wallet’s private key and allow anyone with access to the seed phrase to access the wallet. Currently, the most popular methods of backing up keyphrases tend to be on laptops, paper, or metal sheets. Each of these backup methods could be compromised by hacking, theft, or damage.

How can users overcome these challenges to keep their crypto secure? As with the entire Web3 space, major advancements are underway in the wallet space with the introduction of MPC and seedless wallets. Aside from Frontier technology, a popular existing solution to the disadvantages of the hardware wallet is to use a multi-signature (multi-sig) wallet.

In a multi-signature wallet, several wallets are associated with an address and a threshold of signatures is required. For example, a multi-signature wallet may have 3 signers and require 2 signatures to approve a transaction.

Multi-sig wallets can also be problematic because not all blockchains support multi-sig today, and different blockchains have different multi-sig implementations, which have suffered breaches in the past. Additionally, the user experience of multi-signature wallets can be complex and may not be suitable for an individual crypto investor.

The development of seedless wallets and multi-party compute (MPC) wallets has made strides in improving overall privacy and security. In the case of seedless wallets, the use of technologies such as Shamir Secret Sharing to remove single points of failure with private key management and implement a solution that never exposes the seed phrase to the user , thereby reducing the overall attack surface for the wallet.

Conclusion As Web3 adoption continues to grow, the wallet infrastructure will need to improve. Currently, hardware wallets offer a great solution for crypto holders to improve their overall security, but they need to recognize the shortcomings of the current paradigm. With new secure solutions such as MPC and seedless wallets gaining popularity, securing your crypto and NFT holdings will be easier and safer.

The author is the founder and CEO of Cypherock

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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