Are Your Private Keys Really Private?

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17 Jan 2024

Understanding how private keys and recovery phrases work, especially in the context of hot and cold wallets, is crucial for effective and secure digital asset management. Let’s break down some key topics to consider:

Encryption and Storage of Private Keys on Your Device

Encryption Process:

Private keys in a wallet like Coinbase Wallet are encrypted using sophisticated cryptographic algorithms. This encryption ensures that even if someone accesses your device, they cannot easily decipher the private keys without the correct passphrase or PIN.

2. Storage on Device:

The encrypted keys are stored locally on your device (like a smartphone or computer). They are typically held in a secure area of the device, such as a secure enclave, which is designed to be resistant to various forms of hacking.

Control Over Keys and Coinbase’s Policy

Coinbase Wallet is a non-custodial wallet, meaning Coinbase does not have access to your keys. This is different from the Coinbase exchange, where Coinbase controls the keys.
The level of control can vary in the sense that some wallets might allow more advanced features like setting up multi-signature transactions or customizing network fees, which provide users with different degrees of control over how their transactions are processed.

Origin and Function of Private Keys

Generation: When you first set up a wallet, it generates a private key using a random number generator. This process is done locally on your device to ensure the key’s security.
Role: The private key is essential for signing transactions, which is how you prove ownership of your funds and authorize transactions.

Recovery Phrases and Their Relation to Private Keys

Generation of Recovery Phrase: When a wallet is created, alongside the private key, a recovery phrase (or seed phrase) is generated. This phrase is usually a 12–24 word sequence derived from your private key using a standardized protocol (like BIP39).
Purpose: The recovery phrase is essentially a human-readable form of your wallet’s private key. It’s meant to be written down and stored securely, separate from your device.
Recovery Process: If you lose access to your device, you can use the recovery phrase to restore access to your funds on a new device. When entered into a compatible wallet, the recovery phrase regenerates the original private key.

Security Implications

Best Practices: It’s critical to never share your private key or recovery phrase with anyone and to store them in a secure, offline location. If someone obtains your recovery phrase, they can access your wallet and funds.

In a non-custodial wallet like Coinbase Wallet used in this example, the user has base level control over their private keys, which are encrypted and stored on their device. The recovery phrase, which is a backup for the private key, allows for the restoration of the wallet on a different device if needed. Understanding and securely managing these components are key to maintaining control and security over your digital assets.

Bitcoin
Finance
Self Custody
Cryptocurrency

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