What is Ledger Nano? Introduction to Hardware Wallets
This post contains both non-referral and referral links to a product I use and recommend.
If you’re reading this, you most probably accumulated enough wealth in digital currency to start worrying about security.
You also probably use an exchange to store your coins and understood that it defies the purpose of decentralization.
Lastly, you most probably heard the phrase “not your keys, not your coins” but are uncertain what it actually means.
Let’s start there.
“Not your keys, not your coins” explained
When you keep your crypto assets on an established exchange that you trust, you can be certain that they won’t disappear with your coins tomorrow (although theoretically possible) and that you’ll be able to access your crypto assets by logging in with your mail, password, and 2FA (enable it now if you still haven’t), etc.
What you can’t be certain about however, is that the exchange itself won’t suffer from a third-party attack, commonly referred to as “get hacked”.
And if they do get hacked, the coins assigned to your account and many other peoples’ accounts can be irreversibly gone. Unfortunately, this happens more often than you’d expect.
This loss can be prevented if the crypto assets are instead stored in a hardware wallet that only you have access to. But what’s the difference between having a wallet on an exchange and having a wallet yourself?
Well, this question can’t be answered in full detail without covering blockchain fundamentals. However, it can be summarized, which is nicely done in the Manage your private keys, own your crypto page from Ledger:
Owning crypto assets comes down to managing your private keys. To first receive your assets, you request a transaction to a public address created from your private key. To spend the crypto assets, you digitally sign a transaction using your private key as well.
By using a service that holds your crypto assets, you are putting trust in the service to keep the private keys secure from theft and to send your crypto assets when you request so. As long as you’re not managing your own private keys, you don’t really own your crypto.
So ultimately, it boils down to having control over the private keys used to generate public addresses for receiving and sign transactions for sending.
When using third party custodians, technically, they own the coins and you only have access to them.
Note: in many cases I don’t think that this is a bad practice. But as investors concerned with security, we eventually need to move on to something more secure. At the end of the day, our crypto assets are not insured against theft, defaults, or anything else.
What is a hardware wallet?
The term is used to describe a physical device used by people to keep their private keys in a secure manner.
The hardware wallet, being a piece of hardware, is not exposed to centralized attacks (like exchanges are) or hacks / malware (like software wallets are). By using one, basically, you gain total ownership over the assets protected by your private key – and the private key is stored in a secure, encrypted, offline environment in which nobody but you has access to.
The way the private keys are generated and communicated to the users will be described in a following section. And if there are other questions popping up already, don’t worry – most will be addressed in this post.
Ledger Nano Hardware Wallets
Both Nano Ledger X and Nano Ledger S are examples of hardware wallets that come from a reputable manufacturer and proven secure.
The Ledger products offer state-of-the-art security and, based on my research, are the most cost-effective way to securely store your private keys.
The Ledger Nano X has more performances and thus is a bit more expensive, but if the purpose of having a hardware wallet is security (and it is!) and we’re not concerned about wireless usage, bluetooth connection, or smaller capacity then Nano Ledger S is a great choice as well.
They’re equally secure and support the same currencies, among which are BTC, ETH, XRP, LTC, etc.
Read the full comparison here.
Manage your private keys with Ledger Nano X or Ledger Nano S
When you first open the device, a set of 24 words will be generated. These words are the seed based on which your private keys are generated.
Basically, having control over this list of words will make you have control over your private keys, and thus over your crypto.
So make sure to write them down because these 24 words represent your ownership, are not stored on the device, and can’t be regenerated.
When you connect the device to your lap top, you can use an application such as Ledger Live to see your accounts in a user-friendly way.
And remember, the purpose of the application is the user-friendliness – it gives a great overview of your portfolio, asset allocation, past transactions, etc. However, you can’t really send or receive any cryptocurrency without your private keys, or in other words, without your Ledger Nano device.
For example, whenever you want to send BTC, you can input the destination address but the coins won’t be sent until you confirm the transaction using your Ledger Nano X device. Or the technically correct way of saying this: the coins won’t be sent until you sign the transaction using your private key (which is stored securely, offline, and encrypted on the device).
Basically, the device has the authority over confirming (signing) transactions and creating public addresses that you can share with the world to receive cryptocurrency.
What if I lose my wallet or it gets stolen?
Nothing, basically.
Someone will find it and won’t know what to do with it. Your coins are not stored on the device, but on the blockchain. The device just helps you to access them – and whoever finds / steals it will need your 24 words to do so.
So, as long as you still have your private keys, you still have your coins.
You only lost a piece of plastic.
Get a new device and recover your assets by using your seed.
What if my words get stolen?
If your words get stolen and the thief knows what to do with them, then you’re at risk of losing everything.
“Not your keys not your coins” in full force. So make sure to protect them.
The alternative is keeping your coins on an exchange, in which case you don’t even own your private keys (and thus your coins), so you’re at the mercy of how well some third-party manages their private keys.
And as we said at the beginning, it’s not a matter of trust.
It’s a matter of them being a target of someone with malicious intentions and your net-worth being a collateral damage of a centralized attack.
Protect your private keys
So, ultimately, you need to protect those 24 words as best as you can.
Here are a few ideas that may be useful:
- Don’t save your words online.
- Keep the piece of paper and its contents hidden.
- Never share the words with anyone.
- Shuffle the order, but be able to reconstruct it. You can use a simple sequencing such as writing every other 4 words in reverse order, so if your words get stolen they won’t be able to get access to your coins.
- Don’t write all of them down. Remember the Nth, Mth, and Kth words and write down the rest.
- Keep a backup. If your house burns down, you won’t be able to recover your assets. Keep a backup at a remote location as well. Not digitally and especially not online.
- Set up accounts behind a temporary passphrase. There is an option to use a temporary passphrase – a 25th word that nobody knows if you even set or not, to get access to a completely new set of addresses. Keep a small amount in the accounts behind the 24 words and the majority of your wealth behind this passphrase. This way, even if criminals break into your home and physically force you to give up your keys, you’ll only lose a small portion of your assets – the ones behind the 24 word seed. Note: people using third-party custodians are also vulnerable to physical violence, but without a plan B.
Yes, being your own bank is not easy.
But it’s a consequence of the decentralization and it should be praised rather than criticized.
This is what actual ownership looks like! No intermediaries, regulators, or banks standing in the way between you and your wealth.
It’s beautiful…
Need more info?
This post was more theoretical and aimed towards people who are still uncertain whether they should get a hardware wallet or not.
I’m sure that dilemma is now resolved.
If you’d like a more practical, in-depth tutorial regarding how to set up your Ledger Nano device or have any questions, let me know in the comments and don’t forget to subscribe to receive a mail each time I’m publishing a new post.
Get your hardware wallet
You can use the links below to get your own hardware wallet:
Ledger Nano X
Ledger Nano S
If you use these links, I’ll get a commission at no extra expense for you.
But I didn’t write this post to earn money – I wrote it to educate the vulnerable in a manner that I’d like to have learned about it myself.
So if you own cryprocurrency but are not comfortable with buying through my link, I’d still recommend getting a hardware wallet. Here’s a non-referral link:
Ledger Website
And in case it’s not obvious already, try to buy these devices from the manufacturer itself and especially avoid buying them second hand.
Stay safe!
No Comments