The PERFECT Cold Hardware Wallet - Explained

what's the best place to store the seed

phrase to your crypto so that nobody

including hackers nation states or even

some artificial intelligence created

malware would not be able to access it

welcome to whiteboard crypto the number

one YouTube channel for crypto education

and here we explain topics of the

cryptocurrency world using analogies

stories and examples so that anyone can

easily understand them in this video

we're going to be sharing with you the

perfect cold wallet but first we need to

explain how signing an actual crypto

transaction Works in general a crypto

transaction has many features but for

this video we're going to say that

signing a transaction requires two

inputs and one output the first input is

the private key now this is the key that

is actually used to sign transactions to

verify that you are the owner or the

spender of your crypto number two is a

partially signed transaction now this is

kind of like a blank check but it

already has the amount that you want to

spend on it the date that you're

spending it and who you're spending it

to written onto that transaction

generally this is computed by software

that you use so you never actually see

this thing to use an example let's say

that Bob wants to spend 25 coins today

there are only two things needed to

create a verified crypto transaction and

thus for Bob to spend his 25 coins when

you use your private key to sign the

partially signed transaction it then

becomes a fully signed transaction that

is now valid now this transaction isn't

immediately processed it must first be

broadcasted to a pool of other

transactions for miners or validators to

be able to add to the respective

blockchain for example if it's an

ethereum transaction it then goes to the

ethereum memory pool which will then

eventually get added to the ethereum

blockchain now the cool thing about

these fully signed transactions is that

other people can check the signed

transaction and see that Bob is actually

the one signing the transaction based on

the signature they can also check that

he does have 50 coins to spend and in

this particular transaction he's only

spending 25 and because of that we know

that transaction is valid if the

transaction is valid and also if Bob's

transaction is next in line it's

successfully added to the blockchain and

distributed all the way around the world

now for the rest of this video I have to

explain a Nuance you see when Bob signs

his transaction he doesn't just sign it

Bob because then anyone else could just

copy his signature and spend his money

instead what he does is

cryptographically and mathematically use

his private key to look at the

transaction details to make a unique

signature that only works on this

transaction if Bob had spent 26 coins

instead the signature would be totally

different also if he wanted to spend the

money to another account the signature

would also be totally different and not

just like a little different the entire

signature would be different it's a

little complex but we can use math to

make sure that only Bob had the ability

to sign this way and he signed it in a

way where he used his private key but he

never revealed his private key that way

we're not able to sign like him until

recently many of us believed that the

device named Ledger Nano X worked like

this where it stored your private key in

an encrypted Hardware box that was

accessible whenever you push the right

buttons when you did we assumed that

encrypted box would only accept

partially signed transactions and upon

approval and pushing a couple buttons

could only sign them it's recently been

brought to light that this Hardware can

do much more than that it can use your

private key to actually create

instructions to recreate your private

key outside of the box this has made a

lot of Ledger customers upset because

they didn't believe that the device they

originally purchased could even do that

and if they did know that they wouldn't

have purchased it in reality The Ledger

device could have always done this

essentially extracting the private key

out of the encrypted Hardware even if

it's in a couple parts this video isn't

about that but this video was prompted

by the mass Exodus of U users leaving

their Ledger device with this glaring

vulnerability well it is sad to say that

we should have actually never trusted

Ledger with their closed Source software

as a crypto user anytime we hear closed

Source software we may as well think

back a door that steals your money

because if we can't check what the code

actually does it may as well just be the

worst case scenario open source software

on the other hand means that we can look

at the code and ensure that the device

isn't doing anything malicious and if it

is us or other developers reading the

code could sound the alarms due to this

many Ledger customers are wondering well

what should I do with the millions of

dollar I mean satoshi's on my ledger

right now and that's brought us to the

thought experiment of the perfect cold

wallet I present to you security as a

spectrum insecurity there is no black or

white there's no yes and no there exists

no Perfect Situation there is always a

vulnerability and because of that we

have to think of security as a spectrum

with the best case and maybe a worst

case with many possibilities in between

so let's start at one end of this

spectrum being the best case scenario so

world-class security means never having

to trust any hardware or trust any

software at all in this perfect world

you have a photographic memory and you

can do some amazing math in your head

using both of these skills you use your

seed phrase which you've created in your

head to create your private key and then

you use that to sign a partially signed

transaction all in your head that's a

lot of math usually we have software do

this but at least this way no sensitive

information ever leaves your brain

obviously this is near impossible for

even world-class savants and it's

definitely impossible to assume that

even ten percent of the population can

do this so even though we're saying this

is the best outcome we know it's

improbable we say that there's no

perfect solution because even with

enough time and knowledge of how our

human brains work we may one day be able

to extract these memorized words even if

the participant is unwilling or if the

brain has been frozen for decades so

moving further down the Spectrum we have

the second best situation this is when

you memorize your seed phrase but you

use a one-time use device where you

basically input your seed phrase in and

you input a partially signed transaction

in and then this device will do the

computation for you to come up with a

signed transaction now of course you

would want the device to be open source

meaning that you could actually verify

there's no malicious code and you would

want it to be air gapped meaning that it

had no Wi-Fi or Bluetooth capabilities

even on the hardware level not just

disabled with software it basically

means physically it's not even possible

to transmit signals to the outside

anyways when you're done performing your

single transaction you would then want

to take this device and shoot it with a

gun or incinerate it with 4000 degree

thermite or maybe both now you might be

wondering why would I need a one-time

use device well what if that device has

been compromised to have a hardware

component inside of it which stores any

data that looks like a private Key Well

if it does if you use that device once

and then you save it for later a thief

could break into your house steal that

device and then use the hardware to

extract those saved private keys from

the malicious Hardware piece moving on

our next best solution is very similar

to the last one but if you're like me

and can't fully remember the 24 words in

your seed phrase the next best solution

is to encrypt them and then inscribe

that encrypted version onto a QR code

now your transactions are protected with

something that you have your QR code

along with something that you know a

passphrase to decrypt the QR code into a

usable seed phrase let's say that you

have a device that can take a picture of

the encrypted QR code then you enter

your passphrase into the device which

then decrypts the QR code into a seed

phrase enter your partially signed

transaction and boom you now have a

fully signed transaction that you can

submit and broadcast to the network even

still this Hardware may have a malicious

piece that captures your unencrypted

private key so you may as well shoot and

burn it too right next up we have a

device that's like the previous one

except you simply don't burn it you

still have to trust that the device

doesn't have a back door which is

looking at your inserted private keys

and hopefully not storing them somewhere

that an attacker could steal if they got

a hold of your physical device but it's

still better than storing your private

keys on your computer that's connected

to the internet in reality you could

make one of these devices with an old

laptop you simply take the laptop and

remove the Wi-Fi module maybe you write

some of your own code to sign a

transaction and then you physically type

in your seed phrase to compute the fully

signed transaction then you take that

fully assigned transaction and put it

onto a USB thumb drive or maybe show a

QR code to move that data or rather the

data of the fully signed transaction

from your signing device to your actual

computer so that you can broadcast the

transaction to the internet honestly

someone could easily code this in Python

and if you're interested in doing it

without code check out the project named

seed signer currently it can only send

Bitcoin transactions but how it works is

actually really cool you scan a QR code

of your your encrypted private key and

then you scan the QR code of the

transaction that you want to sign you

push some buttons on the device you

enter your private Key password and then

boom it presents you with a new QR code

that you then scan with your computer's

webcam to submit to the blockchain this

device can be created for less than

thirty dollars and when you turn it off

all the data is wiped from the device so

you could theoretically even share with

your friends with no problem at least

assuming you trust the Raspberry Pi or

that device to not have any malicious

Hardware like we mentioned earlier

number five down this spectrum is what

we all believed ledger to be a device

that stores your encrypted private key

in a secure Enclave or Hardware piece

this way even if someone stole your

actual device like your Ledger they

couldn't actually get your seed phrase

unless they also knew your password

because even if they took the device

apart and tried to break into the

physical parts that hold the private key

and extract them themselves they

wouldn't be able to they would only be

able to extract the encrypted part in

theory a device at this level level

would not even be able to give you the

private key because it's only Built to

sign things unfortunately this is not

how a ledger works because with the

right tinkering or with a malicious

actor at Ledger the secure Enclave can

then be tricked to give you the

ingredients of the private key as we've

recently seen or in other words The

Ledger won't tell you the private key

itself but you could trick it to say the

first letter is a the second letter is B

the third letter is C which is honestly

just as bad okay but what if we had a

device that didn't use a special piece

of Hardware that we had to trust but

instead just stored your private key

already encrypted this way an attacker

would have to know the password too like

we described earlier well this is

actually how many cold wallets work

specifically the trezor it doesn't have

any special Hardware piece and if you

lent it to your technically inclined

friend they could break it apart and

steal your encrypted seed phrase but

again because it's encrypted it wouldn't

work they'd also have to have the

passphrase to break the encryption to

then have access to your funds the last

device I'm going to talk about on this

spectrum is a device that simply stores

your private key unencrypted this means

if someone stole the device they could

also just completely look at and steal

your crypto this is pretty hard to find

because many companies doing this only

sell to uneducated consumers and it's

really bad at this point you might be

wondering where the Ledger device

actually lies well they're like number

48 which is using a device that has the

ability to send your seed phrase to

three different companies if you wanted

to they're right between entering your

private key on a website that does it

for you number 47 and using an advice

that has the ability to send your seed

phrase to three different companies even

if you don't want it to number 49 if you

thought this was a fun thought

experiment don't even get us started on

the security of generating a random seed

phrase I mean for all we know Ledger

already knows what your seed phrase is

simply because when they shipped it to

you they kept a list that you owned

Ledger number 44087 and that one is the

one where your first generated seed

phrase is this and your second generated

seed phrase is this and so on in other

words saying that they know already the

next seed phrase that your Ledger is

going to create because they created the

software that randomly generates those

seed phrases I'd love to tell you that

this is wrong but because we can't

actually look at the software I can't

and that's why I'm not using a ledger

anymore I've recently bought a whole

bunch of new wallets to test out and I'm

gonna definitely share them with this

channel so click the Subscribe button if

you're interested in seeing the

comparison of those wallets thanks for

watching I hope you enjoyed this video I

Really hoped you learned something and

most of all I hope to see you in our

next video