Part 1: Security
In our quest to build the perfect wallet, we’ve learned a thing or two. We know that with so many options, picking the perfect wallet is challenging. So we wanted to share what we’ve observed to make your job a little easier.
Anyone who has scoured the internet in search of the perfect crypto wallet knows that choosing a wallet means balancing many factors. Users must decide what security level they require, what assets they need, and what functionalities they want. Different wallets serve different types of users and virtually no two are the same. Understanding these differences is the first step to picking a wallet that works for you.
In terms of security, the perfect crypto wallet doesn’t exist. At least not yet. Every crypto user knows that choosing a wallet today means deciding between security, privacy, and convenience. The consequences of this choice are obvious to anyone who has browsed Reddit or Quora threads — stolen funds, lost keys, desperate users. To the casual or prospective crypto hodler, this reality can be extremely intimidating.
First, we need to agree on what defines a wallet. The truth is, “wallet” is not the most accurate term. The wallet is a direct reference to the fiat world and the notion of “reserves” which does not apply to the world of blockchains. By crypto wallet, we actually mean any solution that can interact with the blockchain — sending and receiving assets. Wallets don’t really “store” crypto assets since there’s nothing to store. Rather, they generate a set of public and private keys. When you want to send an asset, you sign the transaction cryptographically with your private key and direct the asset towards someone else’s public key. The ledger records these transactions and the blockchain can track how many assets are associated with each private key. The first wallets were simple management systems for these keys. Modern-day wallets offer a much better user experience but still work in essentially the same way.
Crypto wallets today fall within one of two categories. While most wallets tout descriptive catchphrases in an effort to be unique—hardware, software, hot, cold, desktop, paper, mobile, web — the reality is that all wallets fit into one of these two categories:
1. Custodial services: Wallets/services that store your keys for you.
2. Self-Custody: user-controlled wallets/services that make you store your own keys.
Exchanges and custodial services fall into the first category. Software and hardware wallets fall into the second. Exchanges simply “co-own” their user’s funds. They have control over the keys and thus, control over the assets.
What users are left with is a dim reality. Either you sacrifice security for convenience and usability by keeping your crypto on exchanges, or you manage your own security, protecting your private keys and stashing your seed phrase. Even though they’re convenient, history has proven exchanges to be a risky option. They’re attractive targets for hackers and, at times, even the exchange itself proves untrustworthy. Those exchanges are rarely insured and when they are, the coverage is just partial. Managing your own keys seems like an attractive option, but if your key or seed phrase is stolen or lost, your funds are gone forever. There is nothing like the horror of realizing you’ve forgotten your private key. Human error is an unfortunate reality and most people aren’t prepared to “be their own bank.”
Despite the dangers and frequent hacks, a majority of crypto users continue to store their funds on exchanges. One main reason is that exchanges make recovering accounts easy — just click “Forgot My Password.” Self-custody wallets have no such recovery or backup option. For those who opt for a more secure option and store their own keys, the only recovery option exists in the form of a seed phrase. Seed phrases are a string of words (usually between 12 and 24) that are derived from the private key. The seed phrase does allow a user to restore their wallet, but it is entirely up to the user to store the seed phrase safely. If the seed phrase is lost or stolen, the funds are gone forever.
Seed phrases present two challenges. First, they make setting up wallets cumbersome as users must record the phrase by hand — a process which can take 5-10 minutes. Any mistake is extremely costly later on. Second, users are solely responsible for protecting their phrase. Many users store their seed phrases in physical safes or develop their own complicated encryption methods for protecting their valuable seed phrases. Look at this Reddit user who created his own ingenious seed phrase protection system. We’re at a point where users have even begun engraving their seed phrases on steel plates through companies like Cryptosteel.
Even if a user decides to be their own bank, they are forced to accept trade-offs, choosing between hardware and software wallets. Software wallets are the more convenient, as they can be accessed from anywhere and support a host of features (like automated payments or multi-sig options), but they are vulnerable to internet-based attacks. Viruses and phishing scams are common and many users of software wallets have become victims. Hardware wallets are more secure as they remain offline and only require a PIN to access. But hardware wallets are difficult to use and require manual execution to complete a transaction. Even hardware wallets — the “safe” option — have vulnerabilities, and they still require users to safely store their backup phrase. In reality, it doesn’t matter how much more secure hardware is than software (or exchanges for that matter). If you’re responsible for securing your own backup phrase, the strength of your security depends entirely on you.
Some wallet solutions have tried to address this problem by using social schemes for recovery. These systems work by distributing the recovery process between multiple individuals. Users designate “recovery agents” and call upon them if they lose access to their wallet. These systems require a high level of trust to be placed on other individuals with no safety guarantees. The system is also complicated and time-consuming to set up as users need to engage with multiple parties to initiate the social scheme recovery process.
Today, users are forced to take desperate actions because no wallet is both secure and reliable. Either users gamble by trusting an exchange or they take security into their own hands and risk human error. This reality paints a bleak picture for today’s wallets. The solution is obvious — we need a crypto wallet that combines top-of-the-line security with excellent usability. We need a wallet that provides users with safe and effective backup options without them needing to give up control of their funds.
Through all our experience with wallets, we’ve learned that multiple recipes exist for many different needs. Each wallet has pros and cons and it’s up to users to find the solution with the right balance for them. It’s also very clear to us that wallet technology is young and improvements are necessary and inevitable. While picking the right wallet will always be a balancing act, we need more choices for those users frustrated by the lack of suitable options.
Read about Zengo, our new keyless crypto wallet.