What is a Hardware Wallet and How Does it Work?

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What is a Hardware Wallet and How Does it Work?

A hardware wallet is deemed as the safest category of wallets as it stores your cryptocurrency offline, in a physical device you can carry around with you. In an industry which is increasingly plagued by malicious attacks and cyber hacks, this cold storage device can help you protect your Bitcoin and other currencies.

The Main Advantages of a Hardware Wallet

Hardware wallets store users’ private keys securely, by being offline. Keys are stored within the microcontroller of the device, and cannot be exported in plaintext. Such wallets have the distinct advantage of being rather immune to potential viruses or hacks which software or exchange wallets are considerably vulnerable to.

When you do need to connect your wallet online, in order to transfer or trade crypto, you can connect through a secure system which allows you to validate entire operations of the device. Communication is also secure and encrypted, so your private keys never come in direct contact with potentially unsafe software.

How do Hardware Wallets Work?

The different cold storage wallets on the market today operate in different ways, so the best way to explain how they work is with specific examples.

KeepKey

KeepKey is a USB-enabled device capable of storing Bitcoin, Ethereum, and over 50 other cryptocurrencies. Every transaction which goes through this hardware wallet is reviewed and accepted through a convenient display and confirmation option.

KeepKey is able to restore your private keys, using a BIP 0039 recovery seed. As a result, you don’t even need to store your private keys on the device.

Ledger Nano S

As a manufacturer specialising in crypto wallets, Ledger offers several hardware wallets. The Ledger Nano S is the precursor of the company’s latest release, the Nano X, but the Nano S is so well-designed that it remains just as popular today.

The Ledger Nano S shares a lot of features with KeepKey, although it is built upon the secure element (ST31 family) and BOLOS platform. This allows it to execute several applications independently and in isolation of each other. A secure chip protects cryptographic information, and the device comes with a 4 digit PIN lock.

The Risks of Hardware Wallets

While it is true that hardware wallets are indeed extremely safe, they still have some risks which you should know about, in order to keep your funds safe. Some of the less reputable wallets may come with certain design flaws or software bugs which make them vulnerable to unauthorised access. This is why you should always seek to purchase only the best hardware wallets.

It is also possible that hardware is switched en route to you. Secure wallets may be replaced by others without you knowing, or a back door is inserted into your actual device. If you receive a package which seems tampered with in any way you should immediately contact the product manufacturer for advice.

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