- The collapse of FTX has led to a rash of interest in hardware wallets
- Hardware wallets are physical devices that protect your crypto from being sent without your permission
- What exactly is their role and how do they work?
The collapse of FTX has led to a renewed interest in hardware wallets, and rightly so – they represent the best combination of security and practicality for crypto holders. However, not all buyers understand the concept of a hardware wallet, or what it actually does, so in this guide we’re going to remind you of the basic functionality of a hardware.
Hardware Wallets Aren’t Wallets
The first thing to know about hardware wallets is that they aren’t actually wallets – they are a second layer of security that protects a wallet address. To understand the concept, think of a blockchain (e.g. Bitcoin) as a railway and your BTC as a train you own. Your train shares the same tracks as all the other trains, all of which must stay on the rail network at all times.
Seeing as you can’t take your train off the tracks, you need to store it somewhere safe, such as in a private depot. This depot is your Bitcoin wallet, which you create on the software provided by the hardware wallet manufacturer (e.g. Ledger Live or Trezor Suite) on your mobile or computer. This software is the hub through which you will initiate all transactions. It may seem burdensome, or less secure, to do everything through a different device, especially one connected to the internet, but there’s a very good reason for this.
Moving Coins From Your Wallet
When you submit a transaction, your software will ask you to confirm it on the device. This is the equivalent of you telling the rail line manager that you want to move your train out of the depot (except that the line manager is you). At this point, this hardware wallet acts as the key to the train – you have to physically confirm the transaction on the hardware wallet, which tells the software that the request is legit. Each wallet has a different way of confirming it, but the principle is the same – only someone with physical access to the hardware wallet can confirm a transaction.
Once you have confirmed the transaction on your hardware wallet, the wallet software will authenticate the transaction and will send the funds as requested. This is why it is always important to check that the address your hardware wallet is saying it wants to approve sending the funds to is the same as the one you put in.
Keep your Software and Hardware Separate
This process shows why it’s important that the wallet’s functionality is limited – if someone gets hold of your hardware wallet alone they can confirm a transaction but they can’t initiate one, and if someone gets hold of your software wallet alone they can initiate a transaction but they can’t confirm it.
Essentially, this means there’s no chance of someone driving your train away unless they have both the key and the password to get into the depot and the key to start the train. This is why you should always protect your crypto with a hardware wallet if you have large amounts or plan to hold it for a long time.