What Is a Hardware Wallet?

Whether you’ve been exploring crypto for five minutes or five years, you’ve probably heard about hardware wallets. Like other crypto wallets, hardware wallets use a public and private key pair. These keys provide the essential link between a crypto owner and the blockchain address containing their digital assets, such as coins, tokens, and NFTs.  

The public key is the 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. While these keys sound like opposites, the public key is derived from the private key. This means the two codes are inherently linked, guaranteeing that when you send funds to a specific public address, only the person with the corresponding private key can access them. 

This is essentially true for most crypto wallets. But hardware wallets also have a key feature: they store private keys in a specialized computer chip and sign transactions offline. While that may not sound impressive, this simple feature allowed us to create some of the most secure crypto wallets of today. 

But before we dive into the details, let’s start with the basics. In fact, what exactly is a hardware wallet?

What Is a Hardware Wallet?

A hardware wallet is a physical device that stores your private keys in an environment separate from an internet connection. Like other crypto wallets, it provides users with a way to sign transactions and interact with the blockchain.

While they are often confused with cold wallets, they are not the same thing. Cold wallets are wallets specifically for vaulting digital assets—they never interact with a smart contract. Hardware wallets, on the other hand, are capable of acting as cold wallets, but they also have some other interesting uses. 

So, how do hardware wallets work exactly?

How Does a Hardware Wallet Work?

So now you know what you might use a hardware wallet for, let’s look at the underlying tech behind this special device. To operate correctly, a hardware wallet must have a few different features, both digital and physical. 

A Computer Chip

Firstly, hardware wallets need computer chips to store information, including your private keys and the firmware necessary for your hardware wallet to operate. The exact computer chip they might use, and the security associated with it, may differ from hardware wallet to hardware wallet. So it’s always important to check which kind of chip is in yours.

Of course, all Ledger wallets benefit from a Secure Element chip, which is one of the most secure chips in existence. This secure element chip is the same one you’ll find in your bank card or passports, and it’s specifically designed to be tamper-proof. 

An Operating System Designed For Private Keys

To make sure your hardware wallet can use that chip, it also needs an operating system. To explain, the operating system of your device is the key to actually managing complex tasks. It’s responsible for running the apps on your device while keeping them completely secure and protected from each other.

However, it’s important to note that most computer chips are not directly designed for storing private keys. Thus, chips used for this purpose must have a specific operating system. This is exactly why Ledger devices use a custom operating system. 

An Interface For Interacting With the Blockchain

The interface for your hardware wallet runs on an internet-connected device such as a mobile phone or laptop. This allows you to send transactions to the blockchain, including managing your cryptocurrencies and taking part in web3 communities. You might be thinking, “But I can already access the blockchain with my laptop, so what’s the point of a device that uses an interface on a separate device?”

But in fact, your hardware wallet allows you to sign transactions offline. It only uses your internet-connected device to broadcast an already-signed transaction. Keeping that process offline keeps your private keys protected from online threats.

What Is A Hardware Wallet For?

Hardware wallets were one of the most important crypto innovations in previous years. If you’re protecting any kind of value with your crypto wallet, you’ll want to use a hardware wallet. To explain, the biggest risks to owners of digital assets are online threats. Hardware wallets can help protect you from these scams by keeping your private keys offline.

Then, if you want to interact with any blockchain apps or platforms, you’ll want those interactions to be kept separate from your valuable digital assets. Luckily, you can do all of this and more with a single hardware wallet. So let’s explore the largest use cases for hardware wallets:

Managing Multiple Accounts on Multiple Chains

Firstly, hardware wallets can generate private keys for multiple blockchain addresses. This means you can manage accounts for multiple networks and different types of accounts containing different types of digital assets, all from the same device. To keep those keys secure and easy to manage, your hardware wallet generates a secret recovery phrase. This serves as a master key to all of the private keys managed by that device. So, even if you have accounts on multiple networks, you can always recover your accounts with that single recovery phrase. 

Signing Transactions Offline

The Internet is the primary way that hackers and scammers attempt to steal your crypto. Compromising private keys is one of the most common ways that this happens.

To make sure your private keys are not revealed, hardware wallets sign your transactions offline. This means your keys are safe from any potential hackers on your internet-connected devices. And of course, it does this while allowing you to access and manage your keys, signing transactions as you see fit.

Cold Storage (Sometimes)

Some people also choose to use an account on their hardware wallet as a cold wallet. To explain, the terms “cold wallet” and “hardware wallet” are not synonymous.

So, what is a cold wallet exactly?

Put simply, a cold wallet keeps private keys offline, much like all hardware wallets – but its defining feature is that it never interacts with smart contracts, apps, or unknown wallets. In other words, a cold wallet is purely for storing private keys and sending and receiving assets, not for engaging with Web3 applications. And to clarify, an account on your hardware wallet only stays cold if you do not connect it to apps and services.

While setting up this type of account is most user-friendly on a hardware wallet, it’s also possible to use a sound or paper wallet as your cold wallet as well. That’s why these terms are not synonymous at all. However, hardware wallets are still the most popular and user-friendly way to set up and manage a cold wallet. 

Key Features And Benefits of Using A Hardware Wallet

Hardware wallets represent the gold standard in self-custody security. Ledger devices stand out with carefully designed features that deliver both seamless digital asset security and ease of use.

Enhanced Security Architecture

Ledger hardware wallets are equipped with advanced security features to protect your digital assets. They utilize a certified secure element chip to generate and store private keys offline, ensuring they remain safe from online threats. The secure element also drives the tamper-proof secure screens on Ledger devices, which guarantees that you can trust what you see on your Ledger wallet.

Ledger’s secure OS further enhances security by isolating applications and encrypting sensitive data. Additionally, Ledger wallets require physical confirmation for transactions, adding an extra layer of protection. 

This layered security architecture ensures that even if your computer is compromised, your crypto stays secure on your Ledger device.

Self-Custody & Ownership

Ledger hardware wallets empower users with self-custody and ownership of their digital assets. This means that, with Ledger, you are the sole owner of your digital assets, allowing you to manage them independently. Ledger Live app complements this secure self-custody, providing a user-friendly interface for tracking and managing your portfolio, ensuring your assets are secure and accessible only to you.

PIN Protection

Every Ledger device requires a 4-8 digit PIN code that you choose during setup. This PIN provides essential security for daily use—you can’t send/receive crypto, sign transactions, or update firmware without it. Without the PIN, attackers would need to attempt physical hacking, but Ledger devices have robust protections: the Secure Element chip resists power-glitching attacks (unlike some competing wallets), and they’re defended against side-channel attacks that try to uncover PINs by monitoring device behavior during use.

These security measures ensure your Ledger device remains protected from both unauthorized access and physical tampering.

User-Friendly Experience

While hardware solutions could be viewed as less convenient than software wallets in years past, Ledger’s current lineup of devices offers advanced user interfaces without compromising on security. The world’s first secure touchscreen devices, Ledger Flex and Ledger Stax, unlock a whole new level of usability for crypto owners, bringing a familiar smartphone-like experience to securely managing digital assets. Coupled with the Ledger Live app, users can effortlessly track and manage their portfolios, ensuring a seamless and integrated experience across devices.

Access to Multiple Currencies 

Ledger hardware wallets provide the flexibility to manage a diverse portfolio of cryptocurrencies, supporting over 5,500 digital assets, including popular ones like Bitcoin, Ethereum, and Solana, as well as numerous other digital tokens. This multi-currency support allows users to manage their holdings from one secure interface. Not to mention, Ledger wallets can adapt to new cryptocurrencies and blockchain developments, with regular firmware updates ensuring compatibility with emerging technologies. 

How a Hardware Wallet Processes A Blockchain Transaction

Essentially, hardware wallets process blockchain transactions similarly to most wallets that use public and private keys. Firstly, it presents you with the intent (which is essentially the full details of a transaction in an unsigned state), then it prompts you to sign and transmits that transaction to the blockchain. If you’re not familiar with that process, make sure you check out the full article on how a blockchain transaction works first.

But now, let’s see how each component and feature of a hardware wallet works together to illustrate this step-by-step:

1. You connect your Hardware wallet to its interface on your phone or laptop 
2. You initialize a transaction using the hardware wallet’s interface
3. Your hardware wallet presents you with the “intent”, a.k.a. the details of your transaction, with the option to sign or reject its conditions.
4. You approve the transaction by clicking “sign” in the wallet’s interface on your smartphone or laptop.
5. Your hardware wallet will prompt you to confirm the transaction on the device itself. This is known as 2FA (two-factor authentication) and ensures nobody can ever transact with your crypto private keys remotely.
6. Your hardware wallet uses the private key in its computer chip to sign the transaction in a completely offline environment.
7. The hardware wallet sends the signed transaction to your smartphone or laptop hosting its interface. 
8. The smartphone or laptop sends the already signed transaction to the blockchain for processing, without it ever seeing your private keys.

Of course, the process can also differ slightly from hardware wallet to hardware wallet. However, if you’re interested in Ledger devices, make sure you check out the full article on how Ledger wallets process transactions.

Hardware Wallet Risks and How to Mitigate Them

Hardware wallets keep you safe from countless crypto risks, but of course, they can’t protect you from everything. There are some inherent risks with using hardware wallets, and it’s important to understand each one to take the necessary precautions. 

The Security of Your Secret Recovery Phrase and Private Keys

We’ve said it before, and we’ll say it again: Your private keys and secret recovery phrase (also called seed phrase) are extremely important to keep secret. Anyone with access to your private keys will have access to the accounts associated with them. But even worse, anyone with access to your secret recovery phrase will have access to every single account protected by your hardware wallet. Your hardware wallet can’t protect any of your accounts if its secret recovery phrase is compromised. 

Avoiding Malicious Smart Contracts

We know that hardware wallets are perfect for protecting your digital assets from online threats and hacks. But unfortunately, they can’t stop you from signing malicious smart contracts.

To explain, a lot of Web3 is about interacting with smart contracts, a sort of blockchain-based computer program that allows for decentralized blockchain apps and platforms. More often than not, this doesn’t pose a risk. However, not all smart contracts are friendly or kind. Malicious smart contracts might try to steal your digital assets. Then, not all wallets display the full details of the transactions you are signing. This makes it impossible to know for sure what you’re agreeing to until the transaction executes. This type of signing is called blind signing, and it can pose a significant risk to your assets. 

Within the Ledger ecosystem, you can mitigate this risk by accessing blockchain apps and smart contracts thanks to Clear Signing, which displays transaction data in a human-readable format, making it easier to understand what you’re signing. 

Best Practices for Using Hardware Wallets

As with all crypto wallets, storing your secret recovery phrase is priority number one when it comes to securing your hardware wallet. Make sure that wherever you store it, no one else knows where it is. Yes—don’t even tell your partner!

When it comes to staying safe from malicious smart contracts, a key tip is to segregate your assets into multiple accounts controlled by a single hardware wallet. To explain, since you can create multiple accounts protected by a single device, and these accounts are independent from each other, you can mitigate the risk of malicious smart contracts by segregating your assets. All you have to do is set up multiple accounts and designate each for separate tasks.

To learn more about how to do this correctly, make sure you check out the full article on how to segregate your crypto assets. But essentially, splitting up your valuable digital assets into multiple wallets mitigates your risk because even if you sign a bad transaction with one account, your others will stay safe. That means you can transact wherever you like from the same Ledger device that’s protecting your most valuable digital assets. 

How To Choose A Hardware Wallet

Now that you know hardware wallets are the best option for protecting and managing cryptocurrencies, you might be wondering how to get your hands on your own device and which one to choose. For the full details, check out the article on how to choose a hardware wallet. But put simply, you should focus on a few key things, including: its purpose, its flexibility, its accessibility, and its security. 

Ledger has a hardware wallet for every use. If you want to access the newest generation of hardware wallets with secure touchscreens and an upgraded user experience, you might want to check out the Ledger Stax and the Ledger Flex. If you’re looking for a simpler device to start off your city journey or perhaps as a backup device, you may prefer the Ledger Nano S Plus and Ledger Nano X. 

You can rest assured that Ledger devices all benefit from the same top-notch security model, no matter which one you choose. In fact, after more than 7.5 million devices sold, no Ledger device has ever been hacked! If you still can’t decide, make sure you check out the tool to compare hardware wallets.

How To Use a Hardware Wallet

If you’re ready to use your hardware wallet, you might want to know where to start. So, here are some of the ways you can get going with yours.

For the First Time

Using a hardware wallet for the first time means connecting the device to your computer or smartphone and installing the relevant interface software. When you initialize this connection, the wallet will automatically generate a secret recovery phrase (or seed phrase). This code is like the master key to all of the accounts the hardware wallet protects. Thus, it’s also important to keep this code hidden. From there, you can generate multiple crypto accounts and manage them on that device. Yes, that means you can store all of their private keys with that single device, protected by a single recovery phrase. 

Migrating Your Existing Crypto to Your New Hardware Wallet

If you already have some crypto, you can also secure your existing cryptocurrency in a hardware wallet. To do so, just open up a new account for each ecosystem’s asset on your device. For example, if you already own some ETH and some ADA, you will have to install two new accounts on your Ledger hardware wallet: one for Ether and one for Cardano. From there, you can send your cryptocurrencies to those respective accounts, and rest assured, your crypto is secure.

If you’re moving coins and tokens from a software wallet to your hardware wallet, you may be tempted to “import” your keys over to your new hardware wallet using your software wallet’s seed phrase. However, this is not particularly secure. To explain, a hardware wallet can’t protect private keys that were already exposed online. If you were using a software wallet, you have no guarantee that your keys were never exposed, and that defeats a hardware wallet’s main purpose! As a result, it’s imperative to generate brand-new private keys for each asset.          

In the same vein, you should never import your hardware wallet secret recovery phrase into a software wallet. This would store a copy of your keys on your internet-connected device, which wouldn’t be very safe.

Ledger Crypto Security Solutions

So, now you know that hardware wallets combine multiple security components and features to give you full control over your private keys. 

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.

FAQs about hardware wallets

Are hardware wallets safe?

Hardware wallets are a reliable way to practice self-custody while keeping your digital assets safe from online threats. That said, hardware wallets can’t protect you from user error, so it’s important to stay vigilant when signing transactions and to keep your secret recovery phrase (also named seed phrase) safe.

Are hardware wallets worth it?

While you can get a software wallet for free, they are much less secure than hardware wallets as they expose your private keys to the internet. Not only are hardware wallets worth the investment, but there is also a wide range of hardware wallets at different price points, so it’s easy to find one within your budget.

Are hardware wallets anonymous?

It is completely possible to buy and set up a hardware wallet without it revealing your identity. Similarly, you can easily set up as many anonymous crypto accounts on your hardware wallet as you want. It’s important to note, however, that there are functions that you might carry out using your hardware wallet (e.g., on-ramping) that might require you to reveal your identity to a third party.

What happens if my hardware wallet breaks?

Hardware wallets don’t store any cryptocurrencies – that lives on the blockchain. What they actually store are the private keys that allow you to access the funds tied to a specific wallet address. This means that, so long as you retain your secret recovery phrase, you can always recover the accounts that you created in a hardware wallet, even if your hardware wallet breaks or is lost.

What is the difference between hardware and software wallets?

A hardware wallet is a physical piece of hardware that stores your private keys in an offline environment and helps you manage your crypto, while a software wallet is a software that runs on a host like a mobile phone or laptop. Though convenient and free, software wallets expose your private keys to the internet, making them vulnerable to online threats.

Knowledge is Power.