What is a Crypto Hardware Wallet, and How does it work?

| November 17, 2023

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As digital currencies and tokens such as NFTs continue gaining mainstream adoption and widespread popularity, it’s crucial to learn how to keep them secure. A hardware wallet is one of the most reliable methods of safeguarding your private keys and cryptocurrencies.

Here, we’ve outlined the fundamental definition of a crypto hardware wallet and its functions, providing you with the necessary knowledge to use your favourite hardware wallet effectively.

Key Takeaways

  • A hardware wallet for cryptocurrency lets you spend, swap, store, send, and receive assets securely. 
  • Hardware wallets offer you complete control over your digital assets.

What are crypto hardware wallets?

A hardware wallet is a physical device that securely stores your private keys. It allows you to manage your cryptocurrencies and digital assets offline effectively.

The crypto hardware wallet works by generating and storing your private keys offline, away from the internet, and downsizing the risk from potential hackers.

When you want to transact, the crypto hardware wallet device signs the transaction with your private key and broadcasts it to the blockchain network. This means that even if your computer or mobile device is compromised, your hardware wallet for cryptocurrency remains safe.

Most hardware wallets include additional security features like PIN codes, two-factor authentication, and seed phrase backup to protect your assets further. In fact, according to experts, crypto hardware wallets are universally considered the safest option for keeping your digital assets.

How does a hardware wallet work?

A crypto hardware wallet is a single-purpose computing device. It is designed to manage and perform one single function. Often, it consists of one or two buttons or a small screen. There is no direct way to connect the hardware wallets to the internet connection. Because the hardware wallet is not connected to the internet, your device is not at risk of being compromised by a hacker. No hacker can access your wallet content without access to your physical device.  

Any transaction from the crypto hardware wallet must be “signed” using the private key. The transaction is signed with the help of the hardware wallet and software known as a crypto bridge. Crypto bridge is designed to establish a connection between the wallet and the blockchain network and to support transactions executed using a hardware wallet.    

You can connect your cryptocurrency hardware wallet to the PC. With the help of a crypto bridge, you can transfer your crypto-transaction data from one computing device to another. After transferring the data, your hardware wallet signs the transaction using a private key. Once signed, the hardware wallet uploads them back to the bridges. The bridges broadcast the signed transaction to the rest of the blockchain ecosystem to complete the process.   

Throughout the process, your private key never leaves your hardware wallet. The single-purpose hardware wallet for cryptocurrency helps ensure that your private keys remain completely offline. 

Why is protecting the private key important?

“Not your keys, not your asset” 

The blockchain protocol uses the cryptographic private keys to establish a connection between the crypto-holder and the digital assets. It serves as a critical link between the asset and the asset holder.  

Let’s understand how keys work. Every blockchain address (account) is associated with a public and private key. The role of the public key is to function as the address that the crypto holder can share to receive cryptocurrencies and digital assets from other parties. On the other hand, the role of the private key is to grant exclusive and unrestrictive access to the cryptocurrencies and digital asset-related data stored at that address. 

The significance of private keys lies in enabling users with blockchain wallets to exercise control over their blockchain address and its contents.  

Most scammers and malicious actors target your private keys, either via physical means or via your internet connection, because the ownership of the asset is directly linked with the wallet’s private key. 

The Upsides of a Hardware Wallet

Security 

One of the most prominent benefits of utilizing a cryptocurrency hardware wallet as opposed to a web or mobile wallet is its increased security level. The private keys are always kept offline on the device with hardware wallets. This makes your keys far less susceptible to cyber threats or other phishing attacks.  

On top of that, you need to confirm your authorization before executing the transaction on the best crypto hardware wallet to complete the process. Often, this process is referred to as 2FA. It helps ensure that no external entity executes the transaction using your private keys. 

Convenience 

A hardware wallet for cryptocurrency is designed to be portable. It enables you to manage your digital assets while on the move effortlessly. Though hardware wallets are less prompt than web-based or mobile-based wallets, the portability factor is advantageous if you regularly engage in cryptocurrency transactions. 

Compatibility

Managing multiple digital assets on a single crypto hardware wallet device is highly convenient. Numerous hardware wallets in the market are compatible with a wide variety of cryptocurrencies and crypto-tokens, such as Bitcoin, Ethereum, and Bored Ape Yacht Club.  

The downside of a Hardware Wallet

Cost  

Software wallets that are web-based or mobile-based are free. Hardware wallets can be relatively costly compared to alternative choices, such as software wallets. The hardware wallets are shipped with a proprietary OS and a secure chipset. 

Damage 

In the event of a lost, corrupted, or damaged hardware wallet, you may lose access to your cryptocurrency unless you have a backup of your private keys. Most cryptocurrency hardware wallets come with key backup features. 

User-friendly Interface 

 Certain types of hardware wallets for cryptocurrency may possess intricate features that are challenging for certain users to comprehend and utilize. Over the years, using a hardware wallet has become easy, thanks to recent updates both on the hardware and software levels. But most modern hardware wallets make it easy for everyone to use. 

What happens when you lose your hardware wallet?

You may be curious about the security and safety of your digital assets in case you misplace your cryptocurrency hardware wallet. Don’t worry; the good news is that your assets remain entirely secure. 

Digital assets and cryptocurrencies, such as Bitcoin and Ethereum, are stored on the blockchain rather than within the crypto hardware wallet. Its sole function as a tool is to provide access to your private keys. Your holding remains at its original address over the main chain. Additionally, all your assets can easily be retrieved using the recovery or seed phrases. 

When it comes to the possibility of unauthorized access to your crypto, the answer is still negative. Take, for instance, the Trezor or Ledger hardware wallet. Each cryptocurrency hardware wallet is safeguarded by a PIN code that only you know. Without that PIN, no one else can access your private data, even if someone discovers or steals your physical device.

Best Practices

Purchase a brand-new crypto hardware wallet.  

For every user, it is critical to exercise caution when purchasing a hardware wallet. Avoid buying a used or secondhand device and purchase hardware wallet devices from reliable manufacturers. Usually, most hardware wallets and manufacturers feature a visible security guideline, such as a holographic sticker or tags, that alerts you if the respective hardware has been tampered with. When purchasing an ideal device, try to look for damages. If anything appears suspicious or not in its right place, refrain from employing the respective crypto hardware wallet. 

Check addresses before transacting large amounts. 

Hardware wallets are regarded as one of the most secure methods for storing private keys. Still, it requires adherence to standard security best practices. Before transferring a significant amount of cryptocurrency between wallets, verifying the receiving address using a small test transfer is important. It helps eliminate the risk of transacting with unfamiliar wallet addresses. Suppose your crypto hardware wallet features a screen. In that case, ensuring that the recipient’s address on your computer screen matches what the wallet is displaying before initiating a transaction is essential. 

Protect your seed phrase.   

It’s crucial to keep your hardware wallet and recovery seed phrase secure. A seed phrase is a set of 12-24 randomly generated words that serve as an emergency backup recovery method if a crypto hardware wallet is misplaced, erased, or damaged. Every user should treat seed phrases with the same level of care as your private key since whoever possesses them can gain unrestricted access to your holdings. Record your secret phrase on paper or another non-digital medium to protect it. It’s also essential to keep both the hardware wallet and the seed phrase in a safe place. 

Conclusion

Hardware wallets offer superior security, portability, and compatibility with various digital assets. Additionally, they are typically user-friendly. However, it is crucial to remember that they can be expensive and may be lost or damaged. 

Ultimately, whether a hardware wallet is suitable for you will depend on your unique requirements, budget, and personal preferences. If you prioritize security and convenience and are willing to invest in a hardware wallet upfront, it could be an excellent option.

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More on Crypto

Digital Asset markets have taken a giant leap ever since their categorization from purely being a volatile alternate investment asset to now being a robust and regulated asset class. 

The journey of digital assets, most significantly that of blue-chip tokens like Bitcoin and Ethereum, has been nothing short of a protagonist in the fight against traditional financial systems, investment avenues, and age-old yield mechanisms. 

However, it was only after the introduction of regulation for these digital assets that they garnered huge institutional interest, pushing the scale of adoption and inviting the likes of family offices to partake in the “coming of age” story of investing in digital assets. 

In the underlying characterization of digital assets as the next best portfolio addition for institutional investors, with a significant boost kicking in after the launch of Bitcoin ETFs(with Ethereum ETFs also on their way), there are still reservations as to how to go about tackling the security, custody, and management challenges that come with them. 

To discuss how current market conditions are driving family offices to embrace portfolio diversification strategies that include allocating funds to digital assets, we dive deep into the intricacies of digital asset custody

Challenges In Secure Digital Asset Investing For Family Offices 

Family offices, traditionally known for their conservative investing approach, sit in the middle of the institutional investors’ branch, bringing untapped liquidity into the market. Conventionally, family offices used to rely only on safer investment bets to accrue value for their investments, but now they are increasingly dipping their toes into the dynamic world of digital assets. 

Despite the potential for high returns, family offices have historically faced significant challenges when considering digital assets as an investment class. Factors such as market volatility, regulatory uncertainty, and the need for established custody solutions have deterred many from fully embracing digital assets.

Talking about the key hurdles family offices face in navigating this exciting but complex landscape, here are some top-of-the-line challenges for them:

  1. Security Concerns: The nascent nature of digital assets presents unique security risks. Hacking, scams, and volatile markets can threaten portfolio stability. Family offices need robust custody solutions, advanced cybersecurity measures, and comprehensive risk management strategies to mitigate these threats.
  2. Regulatory Uncertainty: The regulatory landscape surrounding digital assets is still evolving, creating uncertainty and compliance hurdles. Family offices must stay updated on changing regulations and navigate complex compliance requirements across jurisdictions.
  3. Limited Expertise: Building internal expertise in digital assets can be time-consuming and expensive. Family offices often need more in-house knowledge and resources to properly evaluate, manage, and secure their digital asset investments.
  4. Lack of Infrastructure: Integrating digital assets into existing portfolio management systems can take time and effort. Family offices need secure and reliable infrastructure to seamlessly store, manage, track, and report on their digital asset holdings.
  5. Complex Valuation: Accurately valuing digital assets can be difficult due to their volatility and lack of standardized methodologies. Family offices need robust valuation frameworks and access to reliable market data to make informed investment decisions.

Enabling Family Offices to overcome challenges in digital asset custody

The promise of digital assets is undeniable, yet the hurdles for family offices can seem daunting. 

Overcoming the challenges mentioned above and finding the best probable solutions for them becomes a hardcore reality that must be dealt with utmost precision. 

At Liminal, we work extensively with institutions looking to go one step beyond simply investing in digital assets and look to operate them securely under all circumstances. The same logic applies to family offices as well. 

In our pursuit of building such a robust infrastructure solution, tailored to address the challenges faced by family offices fully and to empower them in their journey to moving to a new asset class for investment, we have created a comprehensive custody solution, integrated best-in-class security protocols and provide real-time monitoring and risk management services to proactively identify and mitigate potential threats, giving family offices peace of mind knowing their assets are secure.

  1. Security Concerns:

Fortress-grade custody: We leverage multi-sig and MPC wallets, leading asset-to-insurance ratios, and bank-grade security protocols to ensure the safety of your assets. Our CCSS Level-3 certification and FIPS-compliant hardware devices go the extra mile, minimizing security risks and providing unmatched peace of mind.

Advanced Cybersecurity Measures: Our vigilant team constantly employs 24/7 SOC monitoring, strict access controls, and penetration testing to identify and mitigate potential threats.

Comprehensive Risk Management: Our experts help you create and implement tailored risk management strategies, considering internal vulnerabilities, market fluctuations, and evolving threats.

  1. Regulatory Uncertainty:

Staying Ahead of the Curve: We have a dedicated team of compliance experts who stay abreast of evolving regulations worldwide. We integrate crucial compliance monitoring in our solutions such as KYC/KYB, AML, and Travel Rule checks, to help navigate complexities across jurisdictions and proactively adapt our services to ensure your portfolio remains compliant.

Streamlined Reporting: Our platform generates comprehensive compliance reports automatically, saving you time and resources while ensuring transparency and regulatory adherence.

Regulatory Partnerships: We actively engage with regulatory bodies and industry leaders 

to become accredited custodians. Currently, we hold a TCSP license in Hong Kong and have also received an IPA from ADGM for an FSP license for our Abu Dhabi entity. 

  1. Limited Expertise:

Your Digital Asset Knowledge Hub: Our team of seasoned custody, compliance, wallet, and security professionals offers expert guidance on evaluating, managing, and securing your digital asset investments. We share industry insights, educational resources, and ongoing support to enhance your knowledge base.

Dedicated Account Management: A dedicated account manager serves as your point of contact, providing personalized guidance and support tailored to your specific needs and goals.

Extensive Resource Library: Access easy onboarding docs, a curated developer section, seamless user-guiding workflow, and trending topic discussions through webinars, research whitepapers, and market reports to build your understanding of digital assets and make informed investment decisions.

  1. Lack of Infrastructure:

Seamless Integration: Our API library, Liminal Express, seamlessly integrates with your existing portfolio management systems, creating a smooth and efficient workflow for managing your digital assets.

Secure Storage and Management: We provide institutional-grade hot and cold wallets for self and managed custody infrastructure, eliminating the need to build or manage complex systems.

Automated Workflows: Streamline recurring tasks and automate key processes with our automation engine, with powerful functionalities like smart refill wallet, smart consolidation, and auto-sweep, enhancing efficiency and reducing operational burdens.

  1. Complex Valuation:

Reliable Data and Valuation Tools: We offer access to trusted market data providers and valuation tools tailored for digital assets, enabling you to make informed investment decisions based on accurate assessments.

Insurance-as-a-Service: We have collaborated with Costero brokers to provide the best possible insurance to our clients that covers their entire portfolio at the best market price. 

Asset segregation and transparency: We deploy segregated accounts, succession planning, and no rehypothecation of assets to allow family offices to maximize transparency and access. 

Embracing the Future Of Family Office Investing 

The future of wealth management includes digital assets. Family offices are actively exploring this burgeoning space, recognizing the potential for diversification and growth. Liminal Custody stands as your trusted partner in this journey. As a regulated custodian, we offer best-in-class security, industry-leading compliance solutions, and a dedicated team of experts, empowering you to invest in digital assets confidently.

Let Liminal Custody guide you through the process, making the path towards secure and compliant digital asset investment smooth and efficient. Contact us today and explore the new frontier of wealth management

Remember, while the potential is promising, navigating the digital asset landscape requires careful planning and collaboration with trusted partners. Liminal Custody is here to equip you with the knowledge and resources to succeed.

February 23, 2024

As we continue constructing a fully regulated digital asset custody platform, ensuring secure storage for both crypto and fiat assets remains a critical priority. 

To facilitate the last checkpoint of enabling institutions to convert their digital asset treasury into fiat currency, we’re expanding beyond pure wallet infrastructure and integrating seamless fiat off-ramp capabilities for our partners.

We’re thrilled to announce our partnership with Encryptus, licensed and compliant off-ramp solutions tailored for institutional clients. This collaboration elevates Liminal’s service offerings by empowering our partners to convert their digital asset treasuries into fiat currencies efficiently.

Integrating A Seamless Off-Ramp Solution

The digital asset ecosystem historically faced friction points when transitioning between fiat and cryptocurrencies. Off-ramp solutions address this pain point by enabling efficient and streamlined conversion between asset classes, minimising value loss and simplifying compliance processes.

Here’s how off-ramp changes the game:

  • Reduced Friction: Frictionless conversion minimises delays and operational complexities associated with traditional fiat-crypto exchange methods.
  • Enhanced Efficiency: Streamlined workflows expedite asset conversion, increasing speed and cost-effectiveness for institutional and individual users.
  • Optimised Value Preservation: Advanced off-ramp solutions prioritise minimising price slippage and value loss during conversion, protecting user portfolios.
  • Simplified Compliance: Integrated compliance features navigate regulatory complexities, ensuring adherence to relevant financial regulations.

With our partnership with Encryptus, we have embedded their institutional-grade APIs, connecting their off-ramp solution within Liminal’s wallet and custody platform. 

This integration simplifies our clients’ liquidation requirements while keeping their assets secure and more:

  • Effortless Digital Asset to Fiat Conversion: Our partners will be able to access treasury management and facilitate business payments in 54 countries and individual payments in an extensive network of 80+ countries.
  • Streamlined Compliance and Regulation: Our partners will be able to leverage Encryptus’s rigorous licensing and compliance framework, ensuring adherence to stringent financial regulations.
  • Enhanced Platform Value: We will be able to expand the functionality of the Liminal custody solution, attracting institutional users seeking comprehensive digital asset management capabilities.

Moving Towards A Robust Off-Ramp Partnership With Encryptus

The partnership between Liminal and Encryptus earmarks a significant step forward in secure digital asset custody, representing a shared commitment to pushing compliant practices while supplying institutions with easy access to convert their digital assets to fiat. 

For Encryptus, the opportunity to integrate with Liminal’s established platform presents a chance to reach a wider audience and scale their innovative off-ramp solutions to new heights. By streamlining fiat conversion within Liminal’s secure custody infrastructure, Encryptus gains access to a trusted network of institutional users seeking seamless and compliant treasury management.

For Liminal, this collaboration reinforces our dedication to partnering with companies that demonstrably prioritise clear governance and robust policy frameworks. By aligning with Encryptus’s stringent compliance standards, we reaffirm our commitment to building a secure and sustainable future for digital assets, where trust and regulatory certainty go hand-in-hand.

January 22, 2024

Hello world, it’s that time of the month when we share the biggest security breaches in the world of Web3 through our Security and Regulatory Newsletter. 

Liminal believes in optimizing security and custody practices globally across the Web3 industry. Through our Newsletter, we highlight security, regulations, and compliance incidents that have happened in the past month and how one can follow better Security practices to safeguard their digital assets. 

We will also highlight regulatory changes that might have happened globally, which were significant to the overall ecosystem.

Dive in and get a detailed analysis of everything security and regulation in the domain of web3 with Liminal’s Monthly Security and Regulatory Newsletter.

Web3 Security Compromises in January

Abracadabra exploited for almost $6.5 million, Magic Internet Money stablecoin depegs

The Magic Internet Money ($MIM) stablecoin has lost its dollar peg again, dipping all the way below $0.77 in a flash crash before returning to around $0.95.

The depeg appears to be related to an exploit of the Abracadabra lending protocol, which allows people to borrow $MIM. An attacker exploited an apparent flaw in the platform’s smart contracts to drain around $6.5 million.

Goledo Finance hacked for $1.7 million

Goledo Finance, an Aave-based lending protocol, was exploited through a flash loan attack. The attacker stole assets estimated by CertiK to be around $1.7 million.

Goledo Finance contacted the attacker to offer a 10% “bounty” for the return of the remaining assets. In a message on January 29, the attacker wrote: “I hacked Goledo and want to negotiate.”

Socket service and its Bungee bridge suffer $3.3 million theft

The Socket cross-chain infrastructure protocol was hacked for around $3.3 million in an attack that exploited its Bungee bridge. The thieves were able to exploit a bug that allowed them to take assets from those who had approved a portion of the system called SocketGateway.

A little over 700 victims were affected, and the highest loss from a single wallet was around $657,000. 121 wallets lost assets priced at more than $10,000.

On January 23, the protocol announced they had recovered 1,032 ETH (~$2.23 million) of the stolen funds.

Web3 Regulatory Practices for January

The EU Imposes Stricter Due Diligence Rules for Crypto Firms

On Jan. 17, the European Council and the Parliament came to a provisional agreement on parts of the Anti-Money Laundering Regulation (AMLR) that now extends to the crypto sector.

Under the new rules, cryptocurrency firms will be required to run due diligence on their customers involving a transaction amounting to €1,000 ($1,090) or more. 

However, the agreement isn’t final yet as it has to be first officially adopted by the Council and Parliament before the rules can be applied.

So, after the EU passed its landmark MiCA regulation last year, which clarified rules about cryptocurrencies, regulators are now targeting the space with tighter controls. 

While these regulations bolster security and trust in the crypto market, potentially attracting more cautious investors and combating financial crimes, they also present challenges. 

The US State of Virginia Introduces Digital Assets Mining Rights

Recently, the Virginia State Senate introduced Bill No. 339, which outlines regulations for the transactions and mining of digital assets and their treatment under tax laws. 

The legislation exempts individuals and businesses engaged in crypto mining activities from obtaining money transmitter licenses. Additionally, it protects miners from any discrimination. 

Issuers and sellers of crypto are also exempted from securities registration requirements if certain conditions are met. Moreover, those offering mining or staking services are not to be classified as “financial investment” but must file a notice to qualify for the exemption.

The bill further incentivizes crypto’s use for everyday transactions by offering tax benefits. Under this, up to $200 per transaction can be excluded from an individual’s net capital gains or gains derived from using crypto to purchase goods or services, starting from Jan. 1, 2024.

Key Takeaways:

  • Hackers continue to exploit vulnerabilities in DeFi protocols and cross-chain bridges, highlighting the need for robust security measures.
  • Regulatory frameworks are evolving rapidly, with stricter AML rules and supportive legislation for emerging technologies like crypto mining.
  • Staying informed about these developments is crucial for navigating the digital assets market safely and responsibly.

Stay #LiminalSecure

These events highlight the constant evolution of Web3 security and regulation. You can confidently navigate this dynamic landscape by staying informed and prioritizing security best practices. 

At Liminal, we’re committed to empowering institutions to unlock the full potential of digital assets without compromising security or compliance norms with our robust custody and wallet infrastructure solutions. Join us on this journey towards a safer, more accessible future for digital assets.

January 15, 2024

Find Out How You Can Benefit From A Fully Self-Custodial Wallet Architecture