In this third installment of the “From Blockchain to VaultKi” article series, we explore the importance of self-custody and the critical role of seed phrases. Building on the concepts of decentralization discussed in earlier articles, we’ll delve into how seed phrases safeguard your crypto assets, why they are nearly impossible to guess through brute force attacks, and how best to protect them. While various methods such as hardware wallets, Multi-Signature, and Shamir’s Secret Sharing enhance security, all roads lead to the ultimate need for a metal seed phrase storage.
As we dive into the technicalities and real-world examples, it becomes clear: Taking full responsibility for your seed phrase is not just a precaution, it's a necessity.
In the world of cryptocurrency, where decentralization and self-custody are central pillars, one of the greatest responsibilities for any crypto holder is securing their seed phrase. This set of words is the gateway to your crypto-wallet and digital wealth, and failing to protect it can lead to irreversible consequences.
As seen in high-profile cases such as James Howells, who lost more than 7,500 Bitcoin when he accidentally discarded a hard drive containing the keys to his Bitcoin wallet in 2013, the stakes are incredibly high, and regret over not taking informed and appropriate security measures won’t make it better. His Bitcoin, worth a few million dollars at the time, is now valued at few hundred millions. Without access to his private keys or seed phrase, his crypto fortune is irrecoverable.
THE BENEFITS OF SELF-CUSTODY:
A seed phrase is far more than a simple backup, it’s the foundation of your self-custody in the crypto space. The moment you create a wallet, your seed phrase serves as the ultimate key to access and control your digital wealth. It can generate your private keys, which, in turn, derive your public keys and wallet addresses. If your wallet is ever lost, or inaccessible, your seed phrase is the only way to recover it.Despite this importance, many users underestimate the responsibility that comes with managing their seed phrase. Carelessness can result in irreversible consequences, as seen with individuals who lost fortunes simply because they didn’t take appropriate measures to protect their keys.
The seed phrase must be handled with extreme caution. If it falls into the wrong hands, your entire crypto wallet could be emptied without any recourse.
THE CHALLENGES OF MANAGING SEED PHRASES:
Seed phrases typically consist of 12 to 24 words derived from a binary string (0’s and 1’s) generated from random entropy (the measure of randomness or unpredictability in a system), following the BIP39 proposal, which maps this binary data to a readable series of words.
These words are chosen from a list of carefully predetermined 2048 words, and each word is selected so that no two words share the same first four letters. This means that if you only record the first four letters of each word, you can easily recover the entire seed phrase. For more on BIP39 and to download the full list of 2048 words, check out our wordlist page here.
For example, a 12-word seed phrase has 2¹²⁸ (~3.4×10³⁸) possible combinations, and a 24-word seed phrase has 2²⁵⁶ (~1.15 × 10⁷⁷).
To put these numbers into perspective, there are around 100 billion stars in the Milky Way galaxy (~10¹¹), meaning the number of possible seed phrases dwarfs the number of stars! Also, the average adult human body contains approximately 37 trillion cells (or 3.7 × 10¹³), a number still insignificant compared to the possible combinations of a 12-word seed phrase, let alone a 24-word seed phrase.
Even with today’s most powerful supercomputers, some argue that it would conservatively take hundreds of years to guess a seed phrase with a worthwhile amount of cryptos through brute force methods, while others estimate it would take much longer. This makes seed phrases highly secure, provided they are properly managed and stored.
EXAMPLES OF LOSSES DUE TO POOR SEED PHRASE MANAGEMENT:
Several high-profile cases have highlighted the risks of neglecting seed phrase security:
1. Stefan Thomas, a programmer who lost access to 7,002 Bitcoin (now worth hundreds of millions) when he forgot the password to his IronKey, a secure USB drive that contained the private keys to his wallet. He has only two remaining attempts to guess the correct password before the device locks forever, meaning his vast crypto fortune could be lost permanently if he cannot remember the credentials.
2. The founder of LHV Bank, Rain Lõhmus, as reported by Cointelegraph, lost access to his Ether wallet due to losing the private keys. Without a backup of his seed phrase, his 250,000 ETH, now worth over $450 million, is permanently out of reach.
These stories serve as cautionary tales, highlighting the importance of taking seed phrase management seriously.
WHY METAL SEED PHRASE STORAGE IS ESSENTIAL:
At the heart of seed phrase security lies the need for a solution that is both permanent, hazard-proof, and hack-proof, a solution that can stand the test of time and safeguard your access to your cryptocurrency wallet, no matter what. Metal seed phrase storage provides exactly that level of protection.
A metal storage, such as VaultKi, offers a durable and reliable means of safeguarding your seed phrase from both physical and digital threats. These storage solutions are built to withstand extreme conditions, fire, water, corrosion, and even attempts at tampering, making them far more secure than paper wallets or digital backups, which are vulnerable to damage or hacking.
Some of the key benefits of metal seed phrase storage include:
- Physical Durability: Resistant to environmental hazards like fire and water, ensuring that your seed phrase remains intact even in the most extreme conditions.
- Offline Security: Completely disconnected from the internet, protecting your seed phrase from cyberattacks, malware, and other digital threats.
- Longevity: Metal storage provides a long-lasting solution that can protect your seed phrase for generations, eliminating the risks associated with deterioration or accidental loss.
With a metal seed phrase storage, you ensure that the foundation of your wallet’s security is solid. This guarantees long-term safety and peace of mind, knowing that your seed phrase is secure against all potential threats.
ADDITIONAL AND COMPLEMENTARY SECURITY MECHANISMS:
Once you’ve secured your seed phrase using a metal storage, there are additional and complementary security measures that can be layered on top for extra protection. These mechanisms offer higher levels of security but all depend on a solid base: the seed phrase itself must always be protected by a reliable storage method.
1. Hardware Wallets: A hardware wallet is an electronic device that stores your private keys offline. It keeps your keys disconnected from the internet, reducing the risk of hacking, malware, or phishing attacks. Every time a transaction is conducted, the hardware wallet needs to be connected to your computer or phone for the transaction to be signed by your private key and approved by the blockchain.
Use Case: Hardware wallets are ideal for those looking to keep their private keys secure offline while still having access for regular transactions. However, since the hardware wallet needs to be with you at all times to confirm and sign transactions, there is a risk of losing it. If lost or stolen, access to your crypto wallet is lost forever or compromised unless the seed phrase is well recorded on a metal seed phrase storage and stored away from prying eyes. In such cases, you can easily recover your wallet access with the seed phrase.
2. Multi-Signature (Multi-Sig): A Multi-Sig wallet requires multiple private keys, typically an "n-out-of-m" configuration, to authorize a transactions. This approach distributes the security risk across multiple devices or individuals, reducing the chance of a single point of failure compromising the wallet. For example, in a 2-out-of-3 setup, any two keys can authorize a transaction, allowing the system to remain functional even if one key is lost. This is analogous to a corporate bank account, where multiple signatories are needed to approve transactions, ensuring greater oversight and security.
Use Case: Multi-signature wallets reduce the likelihood of a single point of failure. However, each party involved in the multi-sig setup needs to securely store their part of the seed phrase, using a metal storage to protect against loss or damage.
3. Shamir’s Secret Sharing: This method divides your seed phrase into several parts, and only a subset of those parts is required to recover your wallet.
Use Case: Shamir’s Secret Sharing is great for distributing risk. However, it still requires each divided part to be stored securely. If too many parts are lost or damaged, the wallet becomes irrecoverable, so durable physical storage is still a necessity.
4. Adding a Passphrase: It enhances the standard seed phrase with an additional passphrase, creating a two-factor-like security setup. For example, a 24-word seed phrase is randomly generated by the system, but to enhance security even further, a 25th word can be added by the user. This 25th word, or passphrase, can include any character on a keyboard, including upper and lower case letters.
Use Case: Adding a passphrase increases security by requiring two pieces of information (the seed phrase and the passphrase) to unlock your wallet. However, both the seed phrase and the passphrase must be securely stored to prevent loss.
NOT RECOMMENDED:
1. Brain Wallets: In this method, users memorize a complex passphrase instead of physically storing the seed phrase.
Use Case: While brain wallets may seem convenient, they pose significant risks if the passphrase is not sufficiently complex or if it is forgotten. As a backup, storing the seed phrase on a metal storage provides an additional safety net.
2. Paper Wallets: A paper wallet involves printing or writing down your private keys or seed phrases on paper, keeping them entirely offline. It is often viewed as a way to protect against online threats.
Use Case: Paper wallets eliminate the risk of hacking or malware, but they come with significant physical vulnerabilities. Paper can be easily damaged by fire, water, or simply deteriorate over time. Using a metal storage instead provides a far more durable protection.
In conclusion, the journey of self-custody and decentralized finance is both empowering and challenging. Protecting your crypto assets through secure seed phrase management is the cornerstone of this journey. As demonstrated, the risks of losing or mismanaging your seed phrase can lead to irretrievable losses, as seen in high-profile cases like Stefan Thomas and the LHV Bank founder.
Whether you use advanced techniques such as Multi-Signature, hardware wallets, or Shamir’s Secret Sharing, the ultimate protection always comes from backing up your seed phrase using a metal storage, such as VaultKi. This provides the most reliable and secure foundation for any crypto security strategy, safeguarding your assets against both physical and digital threats.
By adopting these critical security measures, you can protect your financial future and ensure the long-term safety of your crypto wealth. Now is the time to make the smart decision and invest in safeguarding your digital assets for generations to come.