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What Is a Burner Wallet?

Beginner
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KEY TAKEAWAYS:
— Crypto wallets are a necessary tool for managing your assets and connecting you to the world of crypto.

— As scammers and other bad actors look for new exploits to take advantage of, proper wallet security is vital for everyone interacting with smart contracts and decentralized applications.

— Using a burner wallet can help protect your privacy and your valuable assets while allowing you to navigate the world of web3 freely.

At its simplest, a crypto wallet is the interface you use to access and manage crypto assets. These days, however, a wallet is much more than that.

Thanks to the growth of smart contract-compatible networks such as Ethereum and Solana, crypto wallets have become an even more important link to the decentralized world. Specifically, they are necessary for connecting to decentralized applications (dApps) which utilize smart contracts to function.

Smart contracts can fulfill various roles and crucially, if you grant approval with your digital signature, they can execute certain functions with your wallet on your behalf. This introduces risk, as approving the wrong smart contract could lead to a bad actor gaining control of your wallet and assets. Indeed, scams involving malicious smart contracts are some of the most common in crypto.

It’s important to note that these risks are present, regardless of the kind of wallet you use. While Ledger devices protect you from hackers, they can’t protect you from your own mistakes. Only proper security practices can mitigate these risks.

Luckily, there are many things that you can do to protect yourself and your assets while exploring the ever-expanding blockchain ecosystem. One such way is to learn how to use a crypto burner wallet – something that Ledger devices enable you to do easily.

But what exactly is a burner wallet and how do you know if you need one? This article will answer those questions and show you how to generate a burner wallet with ease.

What Is a Crypto Burner Wallet?

A burner wallet is a single-use crypto account. Its purpose is to connect to potentially malicious blockchain apps. As such, it should never contain a large amount of crypto or any asset. Rather, a burner wallet should only contain the amount of crypto necessary to cover the transaction that it has been set up for. Similarly, it should not have any markers (such as an ENS domain) that make it easily linkable to its owner.

A burner wallet is much like a burner phone in that it is meant to be discarded after it has served its purpose. Though unlike the extra effort it takes to get a whole new phone, a burner wallet can generally be created quickly and easily right from your Ledger device. 

To explain, hierarchical deterministic (HD) wallets can generate a near-infinite amount of distinct accounts, all accessible with one secret recovery phrase. Of course, all Ledger devices employ the process for HD key generation, which means that you can use your device to make as many burner wallets as you could ever want.

How Does a Crypto Burner Wallet Work?

As previously mentioned, a Ledger device or other HD wallet is capable of generating virtually unlimited accounts. While each of these distinct accounts has its own set of private keys, all accounts that stem from a single wallet are managed by a single secret recovery phrase. In other words, you don’t have to worry about recording a new secret recovery phrase every time you set up a burner wallet. This should encourage you to set up a burner wallet whenever you need one, as this is vital for protecting your assets if you want to interact with dApps.

It’s important to note that while a single secret recovery phrase allows you to access all of these accounts, one compromised account cannot lead back to the main account. That is to say, one compromised account does not mean that the entire wallet is compromised. That is the beauty of setting up a burner wallet.

The best method for using a burner wallet involves segregating your crypto assets between multiple accounts managed by a single wallet. This practice entails setting up three types of accounts: a vault account for storing your assets, a selling account for trading, and a burner account. Since they are HD wallets, you can set up all these different accounts using a single device.

By employing this strategy, you can keep your valuable assets separate from the burner wallet that you use to sign contracts. That way your valuable assets remain secure, even if you accidentally sign a malicious smart contract with your burner wallet.

So now you know what a burner wallet is and how it works, but why use a burner wallet in the first place? 

Why Would I Want To Use a Crypto Burner Wallet?

A burner wallet is perfect for those instances where you want to avoid using your primary crypto wallet to interact with a certain platform or smart contract. There are many scenarios where this might be the case, all of which have to do with maintaining your privacy and the security of your assets.

Privacy

The first reason you might want to use a burner wallet is privacy. As you may already know, public blockchains, such as Bitcoin and Ethereum, are completely transparent. Anyone can look up previous transactions from the network’s entire history.

This system greatly contributes to a blockchain’s trustless nature, as anyone can validate the existence of any transaction. On the other hand, it also makes it quite easy to track an individual’s transaction history and asset holdings.

A burner wallet allows you to transact without people easily tracking your moves. This can be great for crypto traders, who don’t want to expose their trading strategy. In addition, a burner wallet can help avoid leaving a digital footprint, or being tracked by platforms that monitor the wallet addresses that interact with them. 

On a similar note, some people may use a burner wallet to help protect their overall anonymity in the blockchain space. These could be high-profile public figures, or people who may want to keep their crypto usage discreet for professional reasons, or even because of their country of residence.

Accessing New and Untested Blockchain Apps and Platforms

This use case applies most to people who actively trade digital assets like cryptocurrencies or NFTs. Such traders will often try out new platforms like decentralized exchanges (DEXs) or NFT marketplaces. Often these kinds of platforms hold token airdrops to incentivize the onboarding of new users. 

The issue with new platforms is that they might not necessarily act as a user expects. For example, an unvetted smart contract might have bugs in it that prevent you from withdrawing your funds. Even worse, faulty smart contracts could expose you to scammers who can exploit the bugs to steal user funds. Not to mention that a brand new platform could be an outright scam with a malicious smart contract. That’s why using a burner wallet when experimenting with unproven platforms is always key for keeping your main wallet secure.

And speaking of scams…

Interacting with Potentially Malicious Smart Contracts or Apps

The number one reason that you should use a burner wallet is to avoid losing funds to malicious smart contracts. 

Unfortunately, scams involving malicious smart contracts are some of the most common scams within crypto. Usually, these scams entice people to visit a platform with the promise of some potential financial reward such as new token mints or crypto airdrops. Once on the platform, users in a rush to claim the advertised reward end up signing smart contract approvals without fully understanding them. Otherwise known as blind signing, this exposed their wallets to being drained.

A prime example of this was at the height of the NFT bull market when hotly anticipated mints were a daily occurrence. Many people clamoring to join the excitement fell victim to malicious smart contracts, which would drain their wallets before they even knew it.

And these attacks have not gone away. For example, in late December 2023, the notorious hacker group Pink Drainer successfully used a phishing attack to trick an unsuspecting victim into signing an “Increase Approval” function on their wallet. This gave the hackers full access.  As a result, Pink Drainer was able to steal $4.33M worth of Chainlink tokens (LINK) from the victim’s wallet. 

Even more recently on January 2nd, 2024, some users got caught up in a scam involving a fake airdrop mimicking the Less Fees and Gas (LFG) token airdrop. One user ended up losing 52 stETH (worth about $125,000 at the time) after signing a malicious smart contract.

The prevalence of these scams goes to show how using a burner wallet for signing smart contracts is a smart strategy.

Paying with Crypto in-Person

Places such as crypto meetups and conferences, where you might have the option to pay in-person using crypto on a mobile device, are another area where using a burner wallet radically improves security. The issue at these events might not be malicious smart contracts so much as the threat of hackers gaining access to the wallet on your phone. Thus, by using a burner wallet, you can still get the convenience of making these small transactions without taking unnecessary risks. 

Risks Of Using A Crypto Burner Wallet 

Even though burner wallets are great tools for security, you still have to take care to use them properly to avoid the risks that can come with using them.

One of the potential downsides of using burner wallets is the management of multiple accounts.

Fortunately, most wallets today are HD wallets, meaning you can manage a near-infinite number of accounts with the same wallet. You can also recover them all with a single SRP. However, if you’re using another type of wallet, such as a paper wallet, you will have to record the private key of each account. And if you lose that record, you’ll lose access to your funds.

As far as using a burner wallet at in-person events, one thing to keep in mind is that it could restrict your ability to access token-gated events or services. In this scenario, you could simply transfer the specific token that you need to your burner wallet, and transfer it out once you’ve gotten the access that you need. Of course, that token will be exposed to the risk of loss, but you can at least shield the rest of your assets.

One of the more common mistakes regarding burner wallets is using one for multiple transactions. This defeats its purpose, as you will start to build a transaction history that could more easily link your burner wallet to your main wallet.

Finally, it’s important to never leave a large amount of your assets in your burner wallet. When using a burner wallet, you are best off assuming that any funds in that wallet are vulnerable to being lost. After all, the point of a burner wallet is that you only put in the funds necessary to execute the specific transaction you need to. Once you’re done, you should send all valuable assets back to your main wallet.

How Do I Set Up A Crypto Burner Wallet?

Luckily, setting up a burner wallet on Ledger Live couldn’t be easier. You just have to take the following steps:

  1. Select “Accounts” from the left sidebar (you might first have to select “Portfolio” if “Accounts” is greyed out.
  2. Click on “Add account”.
  3. Select the crypto that you want to add an account for from the drop-down menu. 
  4. Connect and unlock your Ledger device. After Ledger Live installs the necessary app, open the app on your Ledger device. 
  5. Check the box under “Add new account” (this option won’t be available if you already have an account for that cryptocurrency that hasn’t had any transactions on it).
  6. After selecting your accounts, click “Add account(s)”.
  7. You can add more accounts by selecting “Add more”, otherwise click “Done” to complete the process.

You can find the full instructions, along with a video tutorial outlining this process on the Ledger support page.

Burner Wallets: Just One Step Towards Security

While wallet security is a high priority for anyone who chooses to acquire crypto assets, it doesn’t have to be an intimidating endeavor. 

Indeed, Ledger makes it easier than ever to gain the knowledge and tools you need to keep your assets safe. That includes giving you the ability to make as many burner wallets as you could ever need, empowering you to explore the exciting world of crypto with confidence.

The HD wallet infrastructure of Ledger devices allows you to segregate your assets into a sell wallet for trading, a vault wallet for the cold storage of assets, and a burner wallet (or mint wallet), and to manage them all seamlessly using your Ledger device and Ledger Live.

So what are you waiting for? Take one of the best steps you can to guard your privacy and secure your assets on the blockchain: pick up a Ledger device to start utilizing a burner wallet the right way.


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