Why and How to Segregate Your Crypto Assets
|— Keeping your private keys offline is the security baseline for crypto – but that doesn’t protect you from every risk.|
— When you sign certain transactions, you let the smart contract interact with everything in your wallet – this means if you make a mistake, all of those assets are at risk.
— Mistakes happen, and it’s up to you to ensure your losses are mitigated if you fall foul of a scam.
— The only way to mitigate your risk is to segregate your assets, ensuring the majority are in a wallet that never interacts with Web3. Here we explain crypto asset segregation.
Asset segregation is an essential part of your crypto management strategy – here we explain how it works with your Ledger Nano.
We all know the drill – keeping your crypto safe means keeping your private keys offline!
But not all threats to your crypto rely on hacking. In fact, increasingly, crypto is stolen by exploiting another vulnerability – you.
Asset Segregation: Your Responsibility
Keeping your private keys offline and avoiding all risk is sort of like hiding inside your house and locking the door – sure, you’ll be completely secure, but you’ll also be cut off from all interaction with the outside world. And interaction is the whole point, right?
The fact is, sometimes you need to open the door.
Web3 is built on smart contracts, and when we explore dApps and DeFi, what we’re really doing is giving their smart contracts permission to interact with the contents of our wallet, sort of like inviting them into our house. Your key is still offline, but you’re permitting a given platform to have some level of access to your assets.
In this situation, the gatekeeper is no longer the wallet itself, but the person opening the door – you. This sounds like an easy question – just don’t let any bad guys in, right? But, as with most things in life, it’s more complicated than that.
Crypto Scams: The Little Red Riding Hood Approach
In Web3, you’ll encounter smart contract transactions, messages and pop-ups on a very regular basis. And you’ll see them in all sorts of contexts: from listing your assets on NFT market places, to interacting with DeFi liquidity pools, and even simply to confirm you’re the owner of a given wallet, as you register for an allow list.
But Web3 UX is still unfamiliar for many people (plus the space is more or less unregulated), meaning it’s easy to miss telltale signs of a malicious smart contract scam. We just saw a great example of this in July with the now famous PreMint scam: here, thousands of people were duped into losing their NFTs and crypto because they signed a well disguised, malicious transaction, which gave the scammer access to everything in their wallets.
With more Web3 degens opting to keep their private keys offline, scams like this are becoming more common, as scammers need to find creative ways to get you to open the door to your wallet. This is why it’s SO vitally important to organize your crypto in a way that mitigates your losses, if you do fall victim to this type of scam.
So how might this look in real life?
Crypto Asset Segregation: An Example
Larry, an experienced Web3 enthusiast, is using a hardware wallet, knowing it’s best to keep his keys offline. Today, he’s busy registering for an upcoming mint and is interacting with the registration site to be in with a chance of getting onto the allow list for his favourite project.
What Larry doesn’t know is that a scammer has managed to hack the minting registration site, creating a “pop-up” that appears to be an innocent part of the sign-up process – it seems normal, so Larry signs the pop-up.
Big mistake – in reality, doing this gives the scammer access to the entire contents of Larry’s wallet, and there is no way of reversing it. It’s an innocent mistake that could happen to anyone, but in the world of Web3, this type of scenario is something all of us need to anticipate.
The ending of this story really depends on how Larry has organized his assets when he first set up his wallet – this mistake could mean a HUGE loss, or it could be a small, controlled one.
So what’s in Larry’s wallet?
Unfortunately for Larry, he had been keeping all of his NFTs in the same wallet he used to sign this transaction. Like many degens, this little mistake cost him dearly, as all of those NFTs can now be spirited out of the wallet by the scammer – Larry opened the door, after all.
But this didn’t need to be the case. In an ideal version of this scenario, losses from this type of mistake would be minimal – and by segregating your crypto assets, you can insure yourself and your collection against this type of mistake.
How to Segregate your Crypto Assets
In basic terms, asset segregation is about making the distinction between a Web3 wallet and a true cold wallet. Let’s break that down.
Designate a Web3 Wallet – Only Use it When Necessary
The first step when it comes to managing your crypto assets is designating just one wallet per asset for interacting with Web3, and labeling it clearly on the Ledger Live App. Why? Because this is the wallet that you’ll give access to when you sign smart contracts, and thus the wallet that will be affected by any mistakes you make.
Most importantly – you will NOT keep the bulk of your collection in this wallet. Rather, you’ll only send the assets you ABSOLUTELY need into it, as and when you need them.
Designate a True Cold Wallet – Never Use it to Transact
Your collection will meanwhile be stored at a completely separate crypto address – also within your Ledger Nano – which will never, ever interact with smart contracts. This ensures that wallet remains isolated from external threats, and is therefore a fortress for your collection.
Using this system provides maximum security for your assets: it means that even if your Web3 wallet is compromised, your other wallets, and everything in them, remain secure.
All you’ll ever need to do is send the assets you need when you need them – we show you how to do that here, by the way.
Mitigating the mistakes, limiting any losses
Scams are a fact of life, especially in a nascent environment like Web3. But making a mistake does not mean you need to compromise the security of your entire collection.
Having a Ledger means YOU are in control – each Ledger Nano can secure as many accounts as you choose to create, meaning that with a little forward thinking, and a firm understanding of how scams work, you can protect your collection, and determine your own Web3 experience.
So keep on learning, know your enemy and above all – segregate those assets! This is your opportunity to protect yourself, don’t miss it.