What is a hardware wallet and how to use it?

What is a Hardware Wallet?

A hardware wallet is a device which will manage cryptographic key pairs (in our case, Ethereum keys). The wallets usually have safe mechanisms for both generating cryptographic keys and signing transactions (among other things).

The idea behind them is that normal computing devices are often plagued by vulnerabilities because we (consumers and developers) use them in many different ways for many different things…often with constantly changing software as well. We are opening the doors for malware and unsafe computing practices.

A hardware wallet is a safe device, that is not updated often. Its purpose is for the safe generation and computation of keys and signatures. Some hardware wallets, such as the Ledger S Nano, go even further and allow you to store things like your two-factor identities on them.

You can think of hardware wallets as little safe computers, working for you to defend your precious keys (and effectively access to your money).

The most popular hardware wallets on the market are:

Using a Hardware Wallet

Most high-quality hardware wallets on the market today usually have a setup phrase. This where you will generate your initial seed phrases (often a Bip39 phrase) and set your passphrase or pin physically on the device. The seed phrases can be used to generate keys for multiple crypto-currencies such as Bitcoin and Ethereum.

The wallets will ask you to write down your seed phrase and will test you to ensure you wrote it down correctly. This is very important. If you do not write it down correctly you can, and most likely will, lose all your funds in the event the device is lost, stolen or damaged. Your seed phrase is your backup, make sure you write it down and secure it properly.

Once the setup phase is over, you can start to use your hardware wallet. This is done by plugging it into a computer or phone and using either the manufacturer’s software or a third-party wallet application to make requests to the device.

Hardware wallets are designed to take requests from computers and phones. However, only the person using the wallet who has the passphrase or pin will be able to follow through with requests from the computer, often to sign-off the requested transactions. There is usually a verification step where you can physically verify on the device what you are signing or confirming.

You should be extremely careful when verifying what you are signing physically on the device. There are cases where if a computer or phone is compromised, it could simply intervene between the trusted third-party app and the hardware wallet and request you to sign-off on a transaction that is invalid or malicious.

Users should be extremely careful and always check, in the verification step, that what is displayed on your computer or phone screen is also being displayed on the device.