The Rally Continues
Self-Sovereign Digital Wallets
“With great power, comes great responsibility” - Ben Parker
The financial revolution ignited by bitcoin's creation is paving the way to a new financial system where users are in control. This control may at first look liberating, but careful attention must be paid to the risks.
I’m sure all of you have heard of a crypto scam, there have been so many. Stealing crypto from external service providers like exchanges and smart contracts to outright Ponzi’s like Mirror Trading International is made even easier in the world of digital assets.
There’s a saying in crypto that goes, “Not your keys, not your bitcoin”. Digital assets are bearer assets; he/she who has the ability to digitally sign and move their bitcoin are the owner of that bitcoin. This week we will explore self-sovereign digital wallets.
Not all wallets are made equal, and every wallet design comes with their own tradeoffs.
But what are digital wallets?
Digital wallets are where you store your digital assets. They are the way you access and interact directly with a blockchain. Each blockchain network has a unique cryptographic method to create a wallet. Most, however, have two unique 'keys'. A public key and a private key. The public key (once hashed) is similar to your bank account number, and the private key is akin to the pin code for your bank card. One you can share when wanting to receive payments, the other needs to be kept confidential and not shared with anyone. The problem comes when storing your private key; it is not just a four-digit pin but rather a string of 64 characters such as E9873D79C6D87DC0FB6A5778633389F4453213303DA61F20BD67FC233AA33262. Not so easy to remember this with confidence, especially if you have your entire life savings stored in the wallet.
Because of this, many people have attempted to create more straightforward, easier ways to store or remember your private key. One of the most popular is through the use of seed phrases. Just as numbers can be expressed as words and digits (zero or 0), your private key can also be expressed the same way. Instead of using the word expression to represent the random number, a seed phrase uses a list of 12 or 24 random words to represent the random number. The purpose is to create a private key in a human-readable format. The majority of wallets nowadays use seed phrases to store and recover your private keys, but what options do you have when it comes to the wallet you use? We will cover three of the most popular:
Option 1: A Browser Extension
Browser extensions are nothing new; you have probably downloaded an extension on Google Chrome at some point. The most popular is the MetaMask wallet.
MetaMask operates as a bridge into the Ethereum network. MetaMask has integrated several DeFi protocols to provide users with a dynamic wallet for interacting with Ethereum financial services. Your private keys are stored on your browser when using MetaMask and never stored or sent to external servers.
When we say “hot wallet connected to the internet”, we are saying that private keys are stored online. If there is an unknown bug in the MetaMask wallet, there is the potential for an attacker to gain access to your wallet and drain your funds.
Option 2: Hardware Wallets
A hardware wallet is a device that often looks like a memory stick. This form of wallet acts as a sandboxed environment when plugged into your computer. Viruses and bugs on your computer cannot affect or ‘hack’ your hardware wallet.
Hardware wallets like the Ledger Nano allow you to custody multiple digital assets; this is unlike the MetaMask wallet that only deals with Ethereum and its other token standards. Every time you want to make a transaction, you will need to connect your hardware wallet to your computer, enter your password and digitally sign your transaction.
The biggest weakness in hardware wallets is regarding the safety of the device itself. Assuming someone was to rob your house and come into possession of your hardware wallet and password, they could drain your account, and there’s no entity you can call to stop it. It is imperative that hardware wallet owners store their hardware, password and seed phrases separately.
As long as you remember your seed phrases, you will always be able to recover your funds.
Option 3: Mobile Application
Ethereum financial services are often complicated and not straightforward to use. Mobile wallets like Argent act as “smart bank accounts” and have direct integrations into multiple DeFi networks. Wallets such as these make interacting with DeFi incredibly simple.
Additionally, wallets like Argent come with extra features. For example, similar to a bank, you can create daily transfer limits or even time locks when making a transaction. Security on wallets such as these is also different. Argent specifically utilises a system of social recovery. When you create your Argent wallet, you will be prompted to nominate wallet addresses of loved ones, friends or business partners. This social recovery system removes the need for you to remember or store your seed phrases.
In the event that you lose your phone or general access to your argent wallet, you can communicate with your social recovery group and re-establish your wallet.
All of these wallets are non-custodial which means that you are in full control of your wealth, you don’t have to trust someone else and certainly don’t have to wait for someone to verify that you are in fact the owner of that money. True self-sovereignty.
These solutions are great but obviously come with their own set of unique risks. Please feel free to contact us for advice when using wallets like these.
Stay tuned as we have a surprise coming this year, a new breed of digital wallet.
Notable Articles and News Stories This Week:
Bitcoin an ‘Emerging Competitor’ to Gold, Says CME’s Chief Economist
Bluford Putnam, chief economist and managing director of CME Group, believes that bitcoin is putting its hand up as a direct competitor to gold. He cites the fact that it has true scarcity because its supply cannot be inflated. He cautions, however, that scarcity doesn’t necessarily mean less volatility. Interestingly he notes that the CME group has seen a waning demand for gold as a hedge against global political risk.
Read more about it here
Alternatively, watch his presentation here
California Pension Fund Loaded Up on RIOT Shares During Bitcoin’s Q4 Rally
The United States’ largest public pension fund added additional shares of the bitcoin mining company RIOT to its investments towards the end of last year. They initially made an investment in 2017 where they purchased 16,907 shares, but during the last quarter of 2020, they have increased that position over sevenfold to a total of 113,034 shares according to their latest filings.
Read the story here
MicroStrategy Offer Playbook for Corporate Bitcoin Adoption at Annual Summit
Michael Saylor, CEO of MicroStrategy held a two-day summit where he presented a playbook for corporates who may want to invest into digital assets. He covers broad topics, from bitcoin as the emerging dominant monetary network, the pros & cons of other assets as a treasury reserve, legal, tax and audit considerations to strategic decisions. It was a highly informative summit and provided a great backdrop for Bitcoin and many of the considerations one needs to make.
Find the videos of the full summit here
Whilst we all have the option to look, to seek to understand, it’s often easier not to. Bitcoin, Ethereum and distributed ledger technology are complex systems that require significant due diligence. At Etherbridge, we aim to lower the barriers to understanding this fast-growing digital economy.
If you are interested in staying up to date, please subscribe to our newsletter at etherbridge.co
This is not financial advice. All opinions expressed here are our own. We encourage investors to do their own research before making any investments.