Introduction:
What’s the best place to store the seed phrase to your crypto so that nobody including hackers nation states or even some artificial intelligence created malware would not be able to access it. So today we’re talking about three major highlights about cold Wallet…
- Singing Transection
- Security Spectrum
- Ledger device
Singing Transection:
How signing an actual crypto transaction Works in general a crypto transaction has many features we’re going to say that signing a transaction requires two inputs and one output the first input is the private key. Now this is the key that is actually used to sign transactions to verify that you are the owner or the spender of your crypto number two is a partially signed transaction now this is kind of like a blank check but it already has the amount that you want to spend on it the date that you’re spending it and who you’re spending it to written onto that transaction generally this is computed by software that you use so you never actually see this thing. To use an example let’s say that Bob wants to spend 25 coins today there are only two things needed to create a verified crypto transaction and thus for Bob to spend his 25 coins when you use your private key to sign the partially signed transaction it then becomes a fully signed transaction that is now valid.
Now this transaction isn’t immediately processed it must first be broadcasted to a pool of other transactions for miners or validators to be able to add to the respective blockchain for example if it’s an ethereum transaction it then goes to the ethereum memory pool which will then eventually get added to the ethereum blockchain. Now the cool thing about these fully signed transactions is that other people can check the signed transaction and see that Bob is actually the one signing the transaction based on the signature they can also check that he does have 50 coins to spend and in this particular transaction he’s only spending 25 and because of that we know that transaction is valid if the transaction is valid and also if Bob’s transaction is next in line it’s successfully added to the blockchain.
You see when Bob signs his transaction he doesn’t just sign it Bob because then anyone else could just copy his signature and spend his money instead what he does is cryptographically and mathematically use his private key to look at the transaction details. To make a unique signature that only works on this transaction if Bob had spent 26 coins instead the signature would be totally different also if he wanted to spend the money to another account the signature would also be totally different and not just like a little different. The entire signature would be different it’s a little complex but we can use math to make sure that only Bob had the ability to sign this way and he signed it in a way where he used his private key but he never revealed his private key that way we’re not able to sign like him until recently many of us believed that the device named Ledger Nano X worked like this where it stored your private key in an encrypted Hardware box that was accessible whenever you push the right buttons when you did we assumed that encrypted box would only accept partially signed transactions and upon approval and pushing a couple buttons could only sign them it’s recently been brought to light that this Hardware can do much more than that it can use your private key. To actually create instructions to recreate your private key outside of the box this has made a lot of Ledger customers upset because they didn’t believe that the device they originally purchased could even do that and if they did know that they wouldn’t have purchased it in reality.
The Ledger device could have always done this essentially extracting the private key out of the encrypted Hardware even if it’s in a couple parts this blog isn’t about prompted by the mass Exodus of U users leaving their Ledger device with this glaring vulnerability. Well it is sad to say that we should have actually never trusted Ledger with their closed Source software as a crypto user anytime we hear closed Source software we may as well think back a door that steals your money. Because if we can’t check what the code actually does it may as well just be the worst case scenario open source software on the other hand means that we can look at the code and ensure that the device isn’t doing anything malicious. And if it is us or other developers reading the code could sound the alarms due to this many Ledger customers are wondering well what should I do with the millions of dollar I mean satoshi’s on my ledger right now and that’s brought us to the thought experiment of the perfect cold wallet I present to you security as a spectrum insecurity there is no black or white there’s no yes and no there exists no Perfect Situation there is always a vulnerability. And because of that we have to think of security as a spectrum with the best case and maybe a worst case with many possibilities in between.
Security Spectrum:
So let’s start at one end of this spectrum being the best case scenario so world-class security means never having to trust any hardware or trust any software at all in this perfect world you have a photographic memory and you can do some amazing math in your head using both of these skills you use your seed phrase which you’ve created. In your head to create your private key and then you use that to sign a partially signed transaction all in your head that’s a lot of math usually we have software do this but at least this way no sensitive information ever leaves your brain obviously this is near impossible for even world-class savants and it’s definitely impossible to assume that even ten percent of the population can do this. So even though we’re saying this is the best outcome we know it’s improbable we say that there’s no perfect solution because even with enough time and knowledge of how our human brains work we may one day be able to extract these memorized words even if the participant is unwilling or if the brain has been frozen for decades.
So moving further down the Spectrum we have the second best situation this is when you memorize your seed phrase but you use a one-time use device where you basically input your seed phrase in and you input a partially signed transaction in and then this device will do the computation for you. To come up with a signed transaction now of course you would want the device to be open source meaning that you could actually verify there’s no malicious code and you would want it to be air gapped meaning that it had no Wi-Fi or Bluetooth capabilities even on the hardware level not just disabled with software. It basically means physically it’s not even possible to transmit signals to the outside anyways when you’re done performing your single transaction. You would then want to take this device and shoot it with a gun or incinerate it with 4000 degree thermite or maybe both.
Now you might be wondering why would I need a one-time use device well what if that device has been compromised to have a hardware component inside of it which stores any data that looks like a private Key. Well if it does if you use that device once and then you save it for later a thief could break into your house steal that device and then use the hardware to extract those saved private keys from the malicious Hardware piece moving on our next best solution is very similar to the last one. But if you’re like me and can’t fully remember the 24 words in your seed phrase the next best solution is to encrypt them and then inscribe that encrypted version onto a QR code now your transactions are protected with something that you have your QR code along with something that you know a passphrase to decrypt the QR code into a usable seed phrase. Let’s say that you have a device that can take a picture of the encrypted QR code then you enter your passphrase into the device which then decrypts the QR code into a seed phrase enter your partially signed transaction and boom you now have a fully signed transaction that you can submit and broadcast to the network even still this Hardware may have a malicious piece that captures your unencrypted private key. So you may as well shoot and burn it too right next up we have a device that’s like the previous one except you simply don’t burn it you still have to trust that the device doesn’t have a back door which is looking at your inserted private keys and hopefully not storing them somewhere that an attacker could steal if they got a hold of your physical device but it’s still better than storing your private keys on your computer that’s connected to the internet. In reality you could make one of these devices with an old laptop you simply take the laptop and remove the Wi-Fi module maybe you write some of your own code to sign a transaction and then you physically type in your seed phrase to compute the fully signed transaction then you take that fully assigned transaction and put it onto a USB thumb drive or maybe show a QR code to move that data or rather the data of the fully signed transaction from your signing device to your actual computer so that you can broadcast the transaction to the internet honestly. Someone could easily code this in Python and if you’re interested in doing it without code check out the project named seed signer currently it can only send Bitcoin transactions. But how it works is actually really cool you scan a QR code of your your encrypted private key and then you scan the QR code of the transaction that you want to sign you push some buttons on the device you enter your private Key password and then boom it presents you with a new QR code that you then scan with your computer’s webcam to submit to the blockchain this device can be created for less than thirty dollars and when you turn it off all the data is wiped from the device. So you could theoretically even share with your friends with no problem at least assuming you trust the Raspberry Pi or that device to not have any malicious Hardware like we mentioned earlier number five down this spectrum is what we all believed ledger to be a device that stores your encrypted private key in a secure Enclave or Hardware piece this way. Even if someone stole your actual device like your Ledger they couldn’t actually get your seed phrase unless they also knew your password because even if they took the device apart and tried to break into the physical parts that hold the private key and extract them themselves they wouldn’t be able to they would only be able to extract the encrypted part in theory a device at this level level would not even be able to give you the private key because it’s only Built to sign things unfortunately this is not how a ledger works.
Because with the right tinkering or with a malicious actor at Ledger the secure Enclave can then be tricked to give you the ingredients of the private key as we’ve recently seen. In other words The Ledger won’t tell you the private key itself but you could trick it to say the first letter is a the second letter is B the third letter is C which is honestly just as bad okay but what if we had a device that didn’t use a special piece of Hardware that we had to trust but instead just stored your private key already encrypted this way an attacker would have to know the password too. Like we described earlier well this is actually how many cold wallets work specifically the trezor it doesn’t have any special Hardware piece and if you lent it to your technically inclined friend they could break it apart and steal your encrypted seed phrase but again because it’s encrypted it wouldn’t work they’d also have to have the passphrase to break the encryption to then have access to your funds.
The last device I’m going to talk about on this spectrum is a device that simply stores your private key unencrypted this means if someone stole the device they could also just completely look at and steal your crypto this is pretty hard to find because many companies doing this only sell to uneducated consumers and it’s really bad.
Ledger device:
The Ledger device actually lies well they’re like number 48 which is using a device that has the ability to send your seed phrase to three different companies. If you wanted to they’re right between entering your private key on a website that does it for you number 47 and using an advice that has the ability to send your seed phrase to three different companies even if you don’t want it to number 49 if you thought this was a fun thought experiment don’t even get us started on the security of generating a random seed phrase. I mean for all we know Ledger already knows what your seed phrase is simply because when they shipped it to you they kept a list that you owned Ledger number 44087 and that one is the one where your first generated seed phrase is this and your second generated seed phrase is this and so on in other words saying that they know already the next seed phrase that your Ledger is going to create.
Because they created the software that randomly generates those seed phrases I’d love to tell you that this is wrong but because we can’t actually look at the software I can’t and that’s why I’m not using a ledger of the cryptocurrency world using analogies stories. For examples so that anyone can easily understand them in this blog we’re going to be sharing with you the perfect cold wallet but first we need to explain how signing an actual crypto transaction Works ?
In general a crypto transaction has many features but now this is the key that is actually used to sign transactions to verify that you are the owner or the spender of your crypto number two is a partially signed transaction. Now this is kind of like a blank check but it already has the amount that you want to spend on it the date that you’re spending it and who you’re spending it to written onto that transaction generally this is computed by software that you use so you never actually see this thing. To use an example let’s say that Bob wants to spend 25 coins today there are only two things needed to create a verified crypto transaction and thus for Bob to spend his 25 coins when you use your private key to sign the partially signed transaction it then becomes a fully signed transaction that is now valid. Now this transaction isn’t immediately processed it must first be broadcasted to a pool of other transactions for miners or validators to be able to add to the respective blockchain for example if it’s an ethereum transaction it then goes to the ethereum memory pool which will then eventually get added to the ethereum blockchain. Now the cool thing about these fully signed transactions is that other people can check the signed transaction and see that Bob is actually the one signing the transaction based on the signature they can also check that he does have 50 coins to spend and in this particular transaction he’s only spending 25 and because of that we know that transaction is valid if the transaction is valid and also if Bob’s transaction is next in line it’s successfully added to the blockchain. And distributed all the way around the world now for the rest of this blog I have to explain a Nuance you see when Bob signs his transaction he doesn’t just sign it Bob because then anyone else could just copy his signature and spend his money instead what he does is cryptographically and mathematically use his private key to look at the transaction details to make a unique signature that only works on this transaction, if Bob had spent 26 coins instead the signature would be totally different also if he wanted to spend the money to another account the signature would also be totally different and not just like a little different the entire signature would be different it’s a little complex but we can use math to make sure that only Bob had the ability to sign this way and he signed it in a way where he used his private key. But he never revealed his private key that way we’re not able to sign like him until recently many of us believed that the device named Ledger Nano X worked like this where it stored your private key in an encrypted Hardware box that was accessible whenever you push the right buttons when you did we assumed that encrypted box would only accept partially signed transactions and upon approval and pushing a couple buttons could only sign them it’s recently been brought to light that this Hardware can do much more than that it can use your private key to actually create instructions to recreate your private key outside of the box this has made a lot of Ledger customers upset because they didn’t believe that the device they originally purchased could even do that and if they did know that they wouldn’t have purchased it.
In reality The Ledger device could have always done this essentially extracting the private key out of the encryption. well it is sad to say that we should have actually never trusted Ledger with their closed Source software as a crypto user anytime we hear closed Source software we may as well think back a door that steals your money because if we can’t check what the code actually does it may as well just be the worst case scenario open source software on the other hand means that we can look at the code and ensure that the device isn’t doing anything malicious and if it is us or other developers reading the code could sound the alarms due to this many Ledger customers are wondering. Well what should I do with the millions of dollar I mean satoshi’s on my ledger right now and that’s brought us to the thought experiment of the perfect cold wallet I present to you security as a spectrum insecurity there is no black or white there’s no yes and no there exists no Perfect Situation there is always a vulnerability and because of that we have to think of security as a spectrum with the best case and maybe a worst case with many possibilities in between.
So let’s start at one end of this spectrum being the best case scenario so world-class security means never having to trust any hardware or trust any software at all in this perfect world you have a photographic memory and you can do some amazing math in your head using both of these skills you use your seed phrase which you’ve created in your head to create your private key and then you use that to sign a partially signed transaction all in your head that’s a lot of math usually we have software do this. But at least this way no sensitive information ever leaves your brain obviously this is near impossible for even world-class savants and it’s definitely impossible to assume that even ten percent of the popular.
Disclaimer:
This is not financial advice, I am simply talking about my experience with cryptocurrency. If you want to invest in cryptocurrency please do your own research and invest at your own risk. We recommend that as a consumer, you exercise your due diligence and research any and all strategies recommended to you before adopting them in your own business. We and other encompassed entities are not responsible for any damages that result from an effort to implement the information provided in this or any other video, article, social media post, and related publications