In this article, I want to talk a bit about where best to store cryptocurrency, what wallets there are and the possible risks of using them.
Obviously, it is better to store your cryptocurrency in your wallet. So let’s understand the types of wallets in detail. As well as how they are organized.
A cryptocurrency wallet is a tool for interacting with cryptocurrencies on the blockchain. It can be used to create and manage addresses for storing and transferring digital assets. Essentially, it is an application with an interface and various functions to manage the address and the crypto assets stored in it.
When you create an address, the wallet generates keys — cryptographic identifiers, a kind of “identity card” that you use to access the funds in your account (address in the blockchain).
Each address usually has a pair of keys — a public key and a private key. They are linked and bound to a specific address.
The address in the blockchain is a “compressed” version of the public key, which can be viewed by any other user. The private key is used to create digital signatures and verify transactions. It is known only to the owner of the address, as it gives access to his funds.
Keys are not needed to enter the cryptocurrency vault — the login and password specified during registration are responsible for this.
Today, most wallets support another level of user authentication — using a seed-phrase. This is a unique sequence of 12 or 24 words in English, which serves as a password to restore access to an address or transfer it to another wallet.
The seed-phrase, as well as the private key, is only for the owner of the address, and cannot be given to anyone else. If the seed-phrase is lost or stolen, you may lose access to your funds.
A custodial wallet is an application for storing and transferring cryptocurrencies, the peculiarity of which is that its operator (custodian) manages users’ addresses or has access to their private keys. In addition, clients of the custodian must undergo identity verification (KYC).
The main disadvantage of custodial crypto wallets is the ability for the custodian to access clients’ crypto assets. The custodian can both provide data about clients and freeze their funds in the wallet. For example, in case of sanctions or seizure of property by court order.
A non-custodial cryptocurrency wallet keeps the creator of the address in full control of their funds, as it does not share their private keys with anyone. Such an app cannot freeze or manage users’ funds, but it is not responsible for their safety.
It is usually an app that can be downloaded on a PC, mobile device or browser. No KYC is required to create an address on the blockchain through a non-custodial app.
Popular non-custodial wallets have the added credibility of publishing their source code. This allows independent experts to verify that the application is really secure. Also, such projects are often supported by a whole community of programmers.
All wallets are divided into two types: “hot”, which exist only as digital applications, and “cold”, which are based on a physical medium. One of the most popular “hot” cryptocurrency wallets for Ethereum and EVM-compatible networks is MetaMask. “Cold” or hardware wallets are devices the size of a flash memory card in which crypto assets are stored offline.
Obviously, non-custodial wallets are the most sought after. They allow you to control your funds, your private keys. They can be installed quickly and in a few minutes you can use them. This category of wallets gives users quick access to decentralized finance protocols (DeFi), Web 3.0, and non-fungible token markets (NFT).
Popular non-custodial crypto wallets are reliable, but still have their disadvantages.
If the private key and the phrase to recover it are lost, the funds will also be irretrievably lost. It is worth being especially careful with “brainwallet”, i.e. with storing data in your memory or on paper.
There are basic guidelines on how to secure your cryptocurrency wallet:
- Take care that the secret phrase (seed-phrase) for cryptocurrency recovery is in a safe place. Do not share it with anyone, write it down on paper
- It is not recommended to make a digital copy of sensitive data such as a seed-phrase or cryptocurrency wallet password. It is not safe to take a screenshot of your phone, email a copy of your seed-phrase, or store it in an app on a mobile device that is connected to the internet. The information can be stolen by malware
- Beware of phishing. This is a type of scam in which scammers obtain a login and password to a wallet by imitating the website of a popular crypto service. Phishing links are very similar to the URL of the real application, but still differ from it by 1 or 2 characters. Therefore, carefully double-check the website addresses (or better yet, save them in your bookmarks) where you enter data to access your funds.
- Be careful with emails. If you are asked to provide confidential information about a cryptocurrency wallet, asked to go to unknown websites or send assets — do not follow the link.
I think these recommendations will help you get more security, but unfortunately there is more bad news about non-custodial wallets. But first let’s understand how such a wallet works in more detail.
The wallet’s operation begins when you create an account, initiating the generation of a unique cryptographic private key. In its unencrypted state, the wallet client can directly access this key, the interface that enables you to interact with your on-chain account.
After the generation of the key, encryption takes place. The user sets a password that the wallet client uses to encrypt the private key. This encrypted key is then stored locally on the user’s device. The encryption makes it tough for unauthorized users to utilize the encrypted key without knowing the password.
Whenever the user unlocks their wallet client using the password, the client decrypts the private key on the user’s device. This action gives the wallet direct access to the decrypted private key during usage. It enables the wallet to sign transactions and messages on behalf of the user.
However, the seemingly secure process of using a non-custodial wallet has a hidden caveat.
From the moment you set up your account, you could potentially compromise your private key, and consequently your assets. You also potentially compromise your private key each time you unlock your wallet for use.
More alarmingly, the software of your non-custodial wallet maintains full control over your private key. A simple software update could silently transform your non-custodial wallet into a custodial one without your knowledge.
The process of account creation and encryption seems secure enough at face value, causing users to overlook the potential security loophole that exists. Once the wallet software client has access to the private key, it could potentially transmit the key to a remote server or use it directly on your device without your explicit approval.
That is, when you use such wallets you must have complete trust in the wallet provider, be sure that the software is bug free, the wallet provider can resist regulatory pressure.
This could really be a problem in the future. The solution I have found so far is in what Braavos Wallet offers. But it seems to me that other wallets will use it in the future.
Braavos solves this problem with Hardware Signer. The Braavos Hardware Signer capitalizes on the security chip within your mobile device, generating hardware keys that remain confined to your device, unknown to anyone. These keys are employed to sign transactions, but only after confirming your unique biometric identity.
This double-layered approach offers solid protection against phishing attacks since the private key remains hidden (even from you). It ensures the security of your keys, even if the device application processor kernel becomes compromised.
Furthermore, this means that even if the application turns rogue, it cannot auto-sign a transaction without the user’s explicit consent.
Why doesn’t every non-custodial wallet utilize this approach?
The main barrier is that the signature scheme utilized in many popular blockchains, including Bitcoin, Ethereum, and even Starknet, isn’t compatible with the secp256r1 signature scheme supported on mobile devices.
However, the Braavos wallet transcends this limitation. Utilizing the unique capabilities of account abstraction and its smart contract structure, Braavos inherently supports the secp256r1 scheme.
As a smart contract-based non-custodial wallet, Braavos operates on two main pillars:
1. A client-side application that allows the user to review and sign transactions.
2. An account smart contract on the blockchain that verifies the signed transactions.
By carrying out the signature verification in the account smart contract (instead of the blockchain OS), we’re able to implement custom signature verification logic that caters to the secp256r1 scheme supported by mobile devices.
So the Braavos Hardware Signer presents a powerful solution to address the inherent security vulnerabilities associated with traditional non-custodial wallets. More information about Hardware Signer can be found in this article.
Now let’s look at another problem — you lost your cell phone or it was stolen from you. Luckily Braavos has this situation covered.
In Braavos, when the user has enabled the Hardware Signer feature, an account will have 2 public keys:
- The Hardware Signer key that will be used to sign all transactions
- The key derived from the seed phrase that can only sign one transaction — a “Request to remove Hardware Signer”
This request to remove the Hardware Signer won’t be executed immediately, but rather will have a time delay of 4 days (configurable). This delay allows the user to use the Hardware Signer to cancel such a request.
This means that if the device gets stolen, lost or bricked, users will still be able to recover their account once the 4 days delay period ends.
However, if their Seed Phrase gets stolen and an attacker issues a request to remove the Hardware Signer, the user will automatically (and repeatedly) get notified and will be able to cancel the request and keep all of the assets safe.
To summarize, we can conclude that non-custodial wallets do not give us a hundred percent guarantee or complete security. But the development of software and new security equipment (such as security chips in cell phones) make it possible to eliminate the disadvantages of non-custodial wallets.
Also, always do your research when it comes to money. You don’t have to rely on advertising, advice from friends or luck. I wish your finances to always remain safe.
Here’s a link to Braavos wallet — https://braavos.app/.
Here’s the article that inspired me to write this article — https://braavos.app/is-your-crypto-wallet-really-non-custodial/
