What is a wallet, and why is it recommended to use a Hardware wallet
A cryptocurrency wallet includes:
- Keys set (public and private key) to get access tokens stored on this wallet
- Algorithms managing these keys and allowing you to execute transactions in a cryptocurrency network
- Hardware wallets: physical devices created to keep your cryptocurrency safe. Some online wallets also support hardware wallets.
- Software wallets: There are many different kinds of software wallets which we will go into more detail on further down the page.
Generate and store on the device a private key
All the operations and transactions are executed on the device. It can display only the result of it: a hash of each operation.
Have a screen to display some information
Have one or more physical buttons
Display transaction information
Require a manual confirmation of an operation using a hardware button
Allow to create a backup of private keys if the device is broken, lost or stolen
Require to install manufacturer-provided software
Works on all modern versions of Windows, Linux, MacOS
Doesn't work on Android
Doesn't allow to install any software on the device
Require to set up a PIN code (or even multiple PIN codes)
Support only few top cryptocurrencies
Let's take a look at some other wallet types.
- In this case your private keys are stored on remote servers, usually owned by the creator of the coin. As a result, a user can lose his tokens if:
- His computer has been hacked and he lost the password
- A remote server has been hacked
- The company went bankrupt
- The FBI (or other authorities) seized company servers
- A software bug in the wallet
- An unauthorized person accessed a smartphone or computer when the owner was logged in
Desktop wallets are software wallets that can be downloaded to a Computer or laptop and can store multiple currencies, One of the most well known is Exodus. However if a computer has been hacked or infected by a virus this can lead to a hacked wallet. A computer has much more vulnerabilities compared to a hardware wallet.
- UI for web wallets.
They have same kind of vulnerabilities as any other web wallet (see above)
- Autonomous wallets.
In this case they are more or less like software wallets installed on a computer and can have same vulnerabilities. The wide spread of mobile devices has lead to the rapid development of viruses for these devices which means that your money isn't 100% safe.
USB Flash Drive
It should be obvious that storing your private keys on a USB drive can not be safe, but people still use this approach.
- Here are a few related problems:
- Any software can read or copy these private keys
- Malicious software can replace the receiver's address
- A loss or a theft can lead to the loss of all your tokens however, it's possible to increase the security using special USB drives requiring you to enter a PIN code to access files. The most well known is the Ledger NANO
A correct store of a private key on paper is quite secure but extremely inconvenient to use. Moreover, you will have to enter your private key in one of the wallet types described above to make a transaction. Conclusion So, using a hardware wallet can't prevent you from all risks but a choice of a trusted manufacturer with a good reputation can help to protect your wallet from much more vulnerabilities comparing to software wallets. It seems the ideal solution is to use an open source software together with an open to general use hardware such as Raspberry Pi or Arduino and a trusted source of the entropy such as a dice.