How a new cold wallet model may solve the mnemonic phrase dilemma

Part of the fear that first-time users experience when using cryptocurrencies is the security of their assets. Unlike fiat currency, which can be stored in a physical wallet, digital currencies must be held in the lesser-known digital wallet. What’s more, with the growing adoption of blockchain technologies, hackers are finding digital wallets an increasingly appealing target. Unfortunately, when it comes to security, cryptocurrency users must learn not only how to protect their assets, but also ensure that their passwords and mnemonic phrases aren’t lost or stolen.

By definition, a mnemonic phrase — also known as a seed phrase — is the simplest way to recover a lost private key. The multi-word secret recovery phrase then becomes the master key that generates all the private keys for users’ wallets, which provides access to their crypto funds. Each crypto address in a user’s wallet has its own unique private key, which is necessary to authorize transactions and confirm ownership over the assets stored in that wallet.

Unfortunately, the double-edged sword of this is that anyone who gains access to the recovery phrase can easily clone a user’s account and spend all the funds in it. Therefore, part of the first-time-user fear of using cryptocurrencies is in how to guarantee security and privacy at all times.

For this reason, many users protect their seed phrases with encryption, adding a word to them, dividing their multi-word seed phrase into parts, or storing parts of this recovery code in different places. However, these methods are not perfect and, on the contrary, are rather inconvenient. Since humans are not perfect, make mistakes, and tend to seek only the easiest solutions, maintaining seed phrases becomes a major barrier for ongoing cryptocurrency usage and adoption. To overcome this barrier, one hardware company is proposing a new alternative to the mnemonic phrase dilemma.

Introducing a new model

In a new cold wallet model, a user’s private key backup is no longer based on a seed phrase. Instead, the key is securely cloned on cards that exist in a pack of three. What’s more, the private key is generated inside the wallet chip based on entropy from the hardware random number generator, which effectively eliminates the mnemonic phase setup most wallets currently use. Under this model, if a wallet is lost or stolen, the assets are still with the owner, as they will have two or three of the other wallet cards. One card can act as the main crypto wallet, the second can be securely hidden, and the third can be left in a safe or given to family members. Even if one of the cards is lost or stolen, it’s not a problem, since each card is protected with a password.

Moreover, with this model, it becomes nearly impossible to crack the password by force or a guessing strategy, as systems can be set up so that when a password is entered incorrectly, after the sixth try, the next attempt delay is increased by 1 second for each unsuccessful attempt, up to 45 seconds. The benefit is that, unlike a wallet protected with a seed phrase, this modern alternative offers additional security to new and experienced users alike.

A patented protocol

Tangem, a company that currently possesses and markets a hardware cold-wallet technology for securing cryptocurrency assets, is piloting this model. The team boasts a simple and secure user experience across the 170 countries the company operates in. Tangem is also the first company to successfully implement the concept of a seedless wallet.

In launching this solution, Andrey Lazutkin, chief technology officer at Tangem, shared:

“The crypto community is accustomed to using mnemonic phrases and sees them as essential. We identified this as an issue from the very outset, as it raises the barrier to entry for beginners and heightens the risk of losing cryptocurrency. This is why we created our patented secure private key reservation protocol. Backups can’t be extracted from the device and can only be used by the wallet owner who knows the password. It’s a simple and safe solution.”

Tangem recognizes that security in hardware wallets is nothing without reliability. Since device failure requires users to have to back up their private key, this opens the door to additional vulnerabilities. Each card features a microcomputer chip that has received certification from Common Criteria at the EAL6+ level, which is the same level of chip protection used in diplomatic passports. The result is the card is impervious to dust, water, and hacking attempts, and has a lifespan of over 25 years. Through a combination of the secure element (SE) chip and an NFC-antenna, the technology that authorizes cryptocurrency transactions through a smartphone virtually eliminates the possibility of any other failures due to there being “nothing to break.”