Recover your crypto using the seed phrase. | Credit: Shutterstock
Key Takeaways
- A seed phrase is a list of randomly generated words that acts as a backup and recovery mechanism for accessing cryptocurrency funds in a wallet.
- It is important to keep the seed phrase secure, as losing it can result in a permanent loss of one’s access to the crypto funds.
- The seed phrase is used to recreate the hierarchical structure of private and public keys in a wallet.
- There are different types of wallets, including seed-based wallets, seedless wallets, and hosted wallets, each with its considerations for security and control.
Understanding Seed Phrases: Securing Access to Crypto Funds
A seed phrase is a list of words generated by a crypto wallet that enables the wallet user to access crypto funds associated with that wallet.
This seed or recovery or a backup seed phrase includes 12 to 24 simple words listed in a specific particular order using simple words such as “open,” “rope,” “forget,” “cheap,” “energy,” and so on. These words are pulled from a list of predetermined words that have unique meaning pairs like “woman” and “women” are not found in the list of words to avoid confusion.
Seed phrase was introduced by the Bitcoin Improvement Proposal 39 (BIP39) in 2013. It was widely adopted after 2013 due to its robust and secure nature, and user-friendliness. The BIP 39 established a standard for deterministic wallets. A deterministic wallet uses a mathematical algorithm to generate a sequence of private and public keys.
Private Key vs. Seed Phrase
The seed phrase and the private key are both essential elements in managing and protecting cryptocurrency wallets. Let’s understand the differences between them.
A private key is a unique, randomly generated string of characters that gives the owner of a cryptocurrency wallet access and control. The associated cryptocurrencies could be permanently lost if the private key were to be compromised, so it must be kept private and secure.
A seed phrase, on the other hand, is a collection of randomly generated words that comes from an algorithm that produces a distinctive cryptographic representation of the private key. The seed phrase must be kept in a secure place because losing it could mean permanently losing access to the funds.
Therefore, the primary distinction between a private key and a seed phrase is how they are used. While the seed phrase acts as a backup and recovery mechanism to restore access to the private key, the private key is the actual cryptographic key that directly controls ownership and access to funds.
How Does A Seed Phrase Work?
The seed phrase algorithm is based on the concept of deterministic wallets and the BIP-39 standard algorithm. An electronic wallet that generates multiple public and private key pairs from a single master key or seed phrase is known as a deterministic wallet .
The fact that the same set of keys can be generated deterministically using the original seed, ensuring that the keys are mathematically linked, is referred to as being “deterministic”.
The wallet software generates a random seed phrase in accordance with the BIP-39 standard when a wallet is first created. A predetermined list of words has an index for each word in the phrase. Typically, this list consists of 2048 distinct words that have been carefully selected to avoid repetition and lower the likelihood of mistakes during recovery.
All private keys for the wallet’s addresses are derived from the seed phrase, which serves as a master key. The wallet software can create a series of private and public keys by employing a procedure known as the Hierarchical Deterministic (HD) wallet derivation path.
To make sure that they are mathematically connected to one another, these keys are derived from the seed phrase in a hierarchical fashion. A type of cryptocurrency wallet known as an HD wallet creates a hierarchical structure of keys from a single seed phrase for better convenience and organization.
The user can use the recovery phrase to restore their wallet on compatible software or wallets in the event that the original wallet is destroyed, lost, or otherwise inaccessible. The wallet software recreates the same hierarchical structure of private and public keys as the original wallet by asking for the seed phrase. The user can thus regain access to their money and the transactions connected to their wallet.
The recovery phrase effectively serves as the wallet’s private keys, so it must be kept private and stored securely. The ability to access the wallet’s money may be permanently lost if the recovery phrase is lost or compromised. Therefore, it is advised to write down the seed phrase on paper and store it somewhere safe and secure, far from potential loss or unauthorized access.
How To Store Your Seed Phrase Safely
To keep your cryptocurrency wallet secure and accessible, it’s imperative to store your seed phrase safely. Following are some guidelines for safely storing your seed phrase:
- Simply write it down on a piece of paper and keep it safe from deterioration like humidity and store it safely from people who may steal the paper.
- You may create several copies of seed phrases and keep them in separate, secure locations. This reduces the likelihood of a seed phrase getting lost due to theft, damage, or natural disasters.
- Engraving the seed phrase onto durable materials such as stainless steel and stored safely in a safe.
- Avoid putting your seed phrase in digital repositories like email, cloud storage, or note-taking software. Digital storage is susceptible to malware, hacking, and unintentional deletion.
- Memorizing the words.
- Choose a safe deposit box, a personal safe, or a secret place in your home as the location to keep your seed phrase. A lock or a bag that can be tampered with might be additional physical security measures to take into account.
Related: Crypto Investment Strategy – 50 Mistakes To Avoid
What Happens If A Recovery Phrase Gets Lost?
Losing a recovery phrase is a nightmare scenario for anyone holding cryptocurrencies. Regardless of the type of wallet used, the recovery phrase is often the only way to access and recover the funds in case of loss or theft.
This is why it’s critical to keep the recovery phrase safe and secure at all times. There have been countless horror stories of people losing their recovery phrases and being locked out of their accounts, sometimes losing fortunes in the process.
In one particularly notorious case, a programmer in San Francisco lost the password to his digital wallet, which contained more than $220 million in Bitcoin. The wallet is still locked and inaccessible, with the funds effectively lost forever. There are countless stories of lost Bitcoin and it is estimated that four million coins are inaccessible and lost forever .
Why Choose Seedless or Hosted Wallets?
For backup and recovery, seedless wallets—also referred to as deterministic wallets or password-based wallets—do not use seed phrases. Instead, they make use of the password or passphrase the user selected when creating their wallet. The wallet can only be accessed and recovered using this password.
Because there is no longer a need to record and store a seed phrase, seedless wallets offer convenience. However, it’s crucial to select a robust and secure password and make sure it is not lost or forgotten. The wallet and funds may become permanently inaccessible if the password is lost.
Custodial wallets, also known as hosted wallets, are wallets that are provided and maintained by outside service providers. Your private keys are kept safe on their servers by these wallets, and you can access your funds by logging into the service provider’s account. Examples of hosted wallets include those offered by cryptocurrency exchanges or online wallet services.
By using a hosted wallet, you give the service provider control over and responsibility for managing and protecting the private keys. They frequently provide extra features like simple account recovery, user-friendly interfaces, and service integration. But using a third party to keep your wallet secure means entrusting them with the care of your funds.
Therefore, before choosing hosted wallets, one must examine the provider’s reputation, security procedures, and terms of service carefully. In addition, they should also be aware of any potential risks and restrictions associated with using such wallets.
The decision between seed-based, seedless, and hosted wallets ultimately comes down to personal preferences for security, control, practicality, and faith in outside service providers. It’s critical to do extensive research and select a wallet option that fits your unique requirements and risk tolerance.
FAQs:
What function does a seed phrase serve?
A cryptocurrency wallet will generate a list of words called a “seed phrase” that users can use to access their funds and use as a backup and recovery system. If the wallet’s original wallet is misplaced, broken, or otherwise inaccessible, it offers a safe way to regain access to it.
How many words do seed phrases typically contain?
Depending on how the wallet is implemented, seed phrases typically range from 12 to 24 words. These words are mathematically linked to the private keys of the wallet.
How can I safely store my seed phrase?
It is crucial to record your seed phrase on paper and store it somewhere safe, away from deterioration and unauthorized access, to ensure the security of your phrase. The seed phrase should not be saved digitally; instead, it should be memorized or engraved on durable materials. For storage, pick a place that is physically secure, like a safe or a safe deposit box.
What are some seed-based wallet alternatives?
Deterministic or password-based wallets, also referred to as seedless wallets, do not employ seed phrases. Instead, they rely on a password or passphrase that the user selects when creating their wallet. On the other hand, hosted wallets are offered and maintained by outside service providers who keep the private keys on their servers. Before using seedless or hosted wallets, it’s important to be aware of the risks and restrictions involved.
