Week 4: Securing your private keys

Not your keys, not your crypto

"Not your keys, not your crypto" is a popular quote in the blockchain space and for good reason. With blockchain assets such as crypto, Non-fungible tokens (NFTs) and others, your private key gives you permission to transfer ownership, therefore complete control. Access to this private key must therefore be protected.

Private & public keys

Contrary to what many think, your digital asset (crypto, NFT etc.) lives on the said blockchain 100% of the time - your private key just gives you permission to transfer it. Think of your public key as your email address and your private key as your password. In the decentralised world of blockchain, these two keys (public and private) live together so if for example, your digital asset is on a centralised exchange and the exchange gets hacked and your asset is included in the hack, then you lose it. This is one of the key aspects of blockchain technology and as actors in this space, we as individuals are responsible for protecting our assets.

The private and public keys are lines of usually between 26 to 35 alphanumeric characters and are uniqely generated for the asset. Here's an example of public and private keys for Bitcoin.

So, to summarise:-

1. Assets live 100% on the said blockchain (e.g. Bitcoin or Ethereum).
2. Holders are 100% responsible for their keys (no forgot password options here)
3. When setting up a digital wallet (hot or cold - see below), you'll be asked to safely note down (offline) what's called a "seed phrase" which is typically a list of 12 or 24 random words that allow you to recover the keys if your wallet (computer, mobile or hardware) is lost or stolen.

It is therefore essential that your actual wallet and your seed phrase are kept apart and private. Never share your seed phrase with anyone as this is what can be used to reinitiate your hardware wallet and control your assets.

Cold vs Hot storage

Cold storage are digital wallets that aren't permanently connected to the internet. Two of the most respected cold storage options are Ledger and Trezor. It must be said that due to how wallets are set up using a seed phrase, they should only be purchased directly from the company's official websites with signed for delivery. Never buy from a reseller or secondhand otherwise you risk your keys being stolen.

Hot storage wallets are connected to the internet the majority / all of the time and there are many options for mobile or desktop. They are usually free and are easy to set up, again with a seed phrase in case you need to recover it down the line. They are however less secure compared to cold storage wallets.

There are benefits of using both or a combination but security should always be the priority. If the wallet is being used for purchases then a hot wallet with a lower balance makes sense but savings and investments with higher amounts should be kept in cold wallets (offline).

It should be noted that cold storage wallets cost between 50 and 150 euros at the time of writing but hot storage wallets are typically free to download. As always, be careful to verify the authenticity of what is being downloaded and from where. It must be stressed that protecting private keys is of the utmost importance.

Example of cold storage use

1. Connect cold wallet to your computer. In the case of Ledger, software called Ledger Live needs to be downloaded from their official website when setting up your device which allows it to sync with your computer.
2. Select option to receive crypto which generates an address.
3. Send your crypto (keys) to this address for storage on the cold wallet. Tip: Always carefully check the address before sending and for larger amounts, sending a smaller test transfer first is always a good idea to verfiy all is correct.

The cold storage device has both your public and private keys so once you've completed the transaction and disconnected the device (taken it offline), your assets are secure.

To transfer your assets from your cold storage to an exchange or another wallet, the process is similar but note, if sending assets to an exchange, you will be asked to also enter a 'destination tag' which will automatically be generated by your wallet. This is to identify your asset amongst the many others on the exchange.

Join us for week 5 to learn more about how blockchain can be used in business. Email me at [email protected]

Disclaimer: The examples provided during the sessions such as Bitcoin, crypto and other assets are to help illustrate some of the use-cases of blockchain. This course is certainly not financial advice so if you decide to invest in any of the mentioned projects then that is at your own risk and I'd strongly advise you to do some detailed research beforehand.

Jeremy.