Just like you have a wallet where you keep your cash, debit cards, and credit cards, there are also virtual wallets to store your virtual money like crypto, and they are called crypto wallets. Although the wallets do not directly hold cryptocurrencies, users keep the passkeys or private keys that give them access to the blockchain where the crypto is actually stored.

Crypto wallets did not come with the introduction of crypto. At the inception of Bitcoin, which is the first crypto asset, holders had to deal with manually inputting long keys when sending cryptocurrencies. However, life is now easier for crypto holders with the development of advanced wallets, such as this crypto wallet, which lets its users buy, swap, or store crypto in a user-friendly and secure manner.

Since we mentioned that crypto wallets are storage for one’s private keys, this means that they must be highly secure to protect against unauthorized access. This brings us to the most critical question: how safe are crypto wallets? The technology behind crypto wallets contributes to how safe they are for use, and we will highlight these factors.

Seed Words

Also known as seed phrases, seed words are combinations of random words peculiar to each crypto wallet that give one access to cryptocurrency. They are also recovery phrases that can be used to recover lost assets, serving as a significant safety measure for self-custodial digital assets.

First of all, the words are exceptionally random and do not make sense as a sentence. They are different words that do not belong to the same classes and are difficult to memorize or guess. Seed words are generated by the wallet software and store data required to access or recover digital assets on blockchain or crypto wallets. The generation of seed words is fueled by the Bitcoin Improvement Proposal 39, popularly referred to as the BIP39. This open-source protocol is behind how crypto wallets automatically create mnemonic sentences to use for access and recovery of cryptocurrencies.

Although seed words are some kind of security, they also need protection themselves. A seed phrase must be jealously guarded against unauthorized access because it is a valuable tool in making crypto transactions. In other words, seed words can potentially give access to private keys that could lead to the entire loss of one’s assets if exposed.

Encryption

Every crypto wallet has two primary keys- private key and public key. While private keys are personal, it is safe to share public keys as it enables others to send one cryptocurrency. Although private keys are mathematically linked to the private key, they work independently and cannot be used to decrypt the private key.

Generally, crypto wallet encryption converts private keys into unreadable format using advanced algorithms. Encryption is another feature that makes crypto wallets safe, as the private keys remain unreadable until they are decrypted with the correct key. In other words, even if unauthorized people gain access to one’s wallet, they will be unable to make transactions without the proper decryption code.

The encryption algorithm converts plaintexts into ciphertexts, and decryption occurs when the ciphertexts are revered into plaintexts using a decryption algorithm and a key. The primary reasons for the conversion are security and confidentiality. While only someone with the correct decryption key can read ciphertexts, it also keeps information confidential by making it appear nonsensical at first glance, preserving the original meaning of the data.

Additionally, encryption in transit also increases the safety of crypto wallets. Many crypto wallets use SSL/TLS encryption to encrypt data while transmitting across networks to prevent unlawful interceptions.

2FA

Crypto wallets provide multi-factor authentication for customers as an added security feature. Emphasis on the “added security feature” because it works in addition to existing passwords or pins. This extra layer is designed to protect one’s crypto wallet in case the password is compromised. In most cases, the 2FA requires a mobile phone or hardware tone to unlock the crypto wallet.

Dual authentication requires what you know and what you have. What you know is typically a password or PIN, and what you have is a physical device to receive a one-time password (OTP), which is only valid for a limited time. Amid the increase in data breaches, hackers will not be successful in going into a crypto wallet even if they have the password when 2FA is enabled. Even if keyloggers intercept the wallet password, they will still be incapacitated due to inaccessibility to the physical devices used in multi-factor authentication.

Blockchain Decentralization

Blockchain decentralization is another key factor that contributes to the safety of crypto wallets. The decentralized nature of blockchain ensures that no single entity controls the network, reducing the risk of single points of failure. Unlike centralized systems, which are often targets for hacks and data breaches, the decentralized nature of blockchain, spread across thousands of nodes, makes it less prone to cyber-attacks.

Decentralization also enables peer-to-peer transactions, eliminating the need for intermediaries and the associated risks. Most importantly, decentralized networks validate transactions using consensus mechanisms such as Proof of Work or Proof of Stake, significantly reducing the occurrence of fraudulent transactions. This robust system provides a high level of security and reassurance for crypto wallet users.