What Is a Hardware Wallet?

By Linda Orenes-Lerma

As cryptocurrencies and digital assets gain popularity, it’s becoming increasingly important to understand how to keep them safe. One of the most secure ways you can protect your keys, and therefore your crypto, is by using a cryptocurrency hardware wallet. In this article, we will explain what a hardware wallet is and how to use one.

What Is a Hardware Wallet?

A hardware wallet is a physical device that stores your private keys in an environment isolated from an internet connection. This means your keys will always remain offline.

A hardware wallet also lets you to sign transactions; allowing you to interact with different blockchain networks. Ledger hardware devices are the most secure way to store your digital assets and they are also easy to use.

How Does a Hardware Wallet Work?

Hardware wallets serve to protect cryptocurrency assets by keeping private keys isolated from internet connection and the threats associated with it. 

A hardware wallet can generate private keys for multiple blockchain addresses. Inside each hardware wallet is a chip that generates your secret recovery phrase (this acts as a skeleton key to all the private keys secured by that device).

When you use a hardware wallet to sign a transaction, it uses your private keys to confirm the transaction. Throughout the whole process, the hardware wallet guarantees your private keys remain completely offline.

Why Are Private Keys Important?

A crypto private key is the essential link between a crypto owner and the blockchain address containing their assets.

Each blockchain address has a corresponding private key and public key. To explain, the public key is essentially the blockchain address you would share, allowing others to send crypto to you. The private key, on the other hand, gives you exclusive access to the crypto or data stored at the corresponding address.

Private keys are important because they give blockchain users agency over their blockchain address and its contents.

Not Your Keys, Not Your Crypto (NYKNYC)

To sign a blockchain transaction, you need a cryptographic private key. Consequently, losing control of a private key means losing control of that address, and any value stored there. This is why crypto security is so critical.

Private keys can be targeted by scammers, either physically or via your internet connection. So using a hardware wallet, which keeps your private keys offline, is essential.

How To Transact With a Hardware Wallet

A hardware wallet enables you to sign transactions, even while your private key remains inside the device.

To initiate a transaction, you must connect your wallet to the relevant software on your computer. From there, you’ll need to confirm the transaction on the hardware itself in order to complete the process. 

This is known as 2FA (two factor authentication) and ensures nobody can ever transact with your crypto private keys remotely.

How Does a Hardware Wallet Transaction Work?

To properly understand the value of a hardware wallet, it’s important to understand how it handles transactions. 

Transactions are split into two distinct phases: intercepting the intent, and transmitting the verified transaction back to the blockchain. 

First, you will receive “the intent”; this is a full detail of the transaction, but in an unsigned state. Your wallet device receives this information asks you to sign. When you do, this raw data is cryptographically signed by your private key. This ensures the private key never leaves the device. 

Once the intent is signed, it becomes a fully verified transaction. Only this transaction can leave the device. Accordingly, it is transmitted to the blockchain, thus completing the process.

What Is a Cold Wallet?

A cold wallet is a crypto hardware wallet that keeps private keys offline – but its defining feature, and what sets it apart from a hardware wallet more generally, is that it never interacts with smart contracts. In other words, it is purely for storing private keys – not for engaging with Web3 applications.

A hardware wallet may simultaneously be a cold wallet – but only if you never use it to interact with smart contracts. Let’s explore that in more detail.

Smart Contracts: A Risk Even Offline Keys Can’t Avoid

Web3 is built on smart contracts, and engaging with Web3 (dApps, DeFi and more) means allowing your wallet to interact with those smart contracts. But this carries risk.

Smart contracts are simply lines of code that execute a particular action when you agree to them. But there are a couple of problems with this.

First, not all wallets display full details of the smart contract you’re signing. This makes it impossible to know for sure what you’re agreeing to, until the transaction executes. This is called blind signing. Blind signing can pose a significant risk as smart contracts are hard to read, and human error is common.

Similarly, even if you can see the details, but don’t completely understand what you are signing, you may still make a mistake. Web3 is new, data is not always displayed in the format we are used to – and mistakes are going to happen.

In either of the above cases, even an offline key cannot protect your wallet if you’ve signed a bad smart contract. This is why SOME wallets do not interact with them at all.

Why Cold Wallets Are So Secure

Cold wallets are purely for securing your private keys, not for interacting with smart contracts. You can keep the bulk of your crypto completely safe in a cold wallet; when you want to interact on Web3, simply move the crypto you require into an active Web3 wallet. This mitigates your risk because even if you sign a bad transaction, the bulk of your crypto remains isolated from the mistake. 

Setting Up Your Hardware Wallet

In order to use a hardware wallet, you will first need to set it up. This usually involves connecting the device to your computer and installing the relevant software. You can then generate crypto accounts and their private keys. The wallet will automatically generate a secret recovery phrase (or seed phrase) that gives the user access to the private keys stored by the device.

Secure Your Crypto With a Hardware Wallet

To secure your existing cryptocurrency in a hardware wallet, you must create a brand new address for each of your different blockchain assets within the hardware device. You would then pay the transaction fees to send each one from its existing wallet to that new address. 

Even a hardware wallet can’t protect private keys that were already exposed online. This is why it’s imperative to generate brand-new private keys for each asset.

You should never recover your existing software wallet on your hardware device using the recovery phrase. The keys for your assets in a software wallet have been exposed to the internet, which defeats the purpose of hardware storage.

Similarly, you should never import your hardware wallet secret recovery phrase into a software wallet. This exposes your keys to the internet, again removing the protection offered by the device.

What If You Lose Your Hardware Wallet?

You might be wondering “what happens if I lose my hardware wallet?” The good news is – your crypto would still be completely safe.

Cryptocurrencies (like Bitcoin, Ethereum and thousands of others) are stored on the blockchain, not in the wallet. The wallet simply lets you access your private keys. Your crypto is exactly where it always was, and it is simple to recover using the recovery phrase, or seed phrase.

If you’re wondering “can someone access my crypto?”, the answer is still “no”.

Let’s use Ledger hardware wallets as an example. Every device is protected by a PIN code known only to you. The device cannot be accessed without that PIN – so even if someone else finds (or steals) your device, they will not be able to access your private data or your crypto. 

Ledger Crypto Security Solutions

Ledger hardware devices combine multiple security components and features to give you full control over your private keys, while you retain the flexibility of interacting with Web3’s new options. You can read more about why Ledger is the leading crypto security product here.

Navigating Web3 securely means staying equipped with the right tools, as well as understanding the risks you face in this new environment. Ledger’s mission is to provide you with both, so that you can explore with confidence.

Knowledge is power