Demystifying Seed Phrases: Your Essential Tool for Crypto Security
Cryptocurrency is a form of digital or virtual currency that's designed to use cryptography to effectively secure transactions. There is no central regulating authority for cryptocurrencies per se, which makes the systems they operate on more decentralized and secure than centralized networks.
When investors purchase crypto coins, the assets are often held in digital wallets. It's possible for wallets to become broken or lost over time. In this scenario, it would be nearly impossible for users to recover their coins without a seed phrase. Thus, a seed phrase allows investors to securely maintain their assets.
Key Takeaways:
Seed phrases consist of either 12 or 24 words that contain the data necessary to recover the funds stored in crypto wallets.
Your personal phrase gives you complete access to your crypto assets, even if you lose your wallet.
Crypto seed phrases can't be hacked directly, but can be stolen if not kept secure.
What Is a Seed Phrase?
A seed phrase consists of 12 or 24 words that give you the data you need to recover your crypto wallet when you don’t have access to it. Designed to be used as a security measure for digital assets, popular wallets like Ledger, MetaMask and Exodus use these phrases.
Importance of Seed Phrases for Crypto Security
A seed phrase is highly important for crypto security because of its many applications. The phrase itself isn't needed whenever you wish to access your crypto wallet. Instead, it allows you to enable several different functionalities that make it easier for you to manage your crypto assets. The primary reason to use a seed phrase is to give your crypto wallet more security.
Crypto seed phrases have three applications::
Switching a wallet
Generating a new wallet
Restoring a lost or broken wallet
If you need to switch your current crypto wallet to another application or device, you can use the phrase of your choice to access the wallet on a completely different device. Let's say you first installed your crypto wallet on your smartphone. The seed phrase allows you to enter the wallet on your desktop computer or tablet with relative ease.
It's also possible to generate a crypto wallet with your phrase. Whenever you're setting up a wallet, you'll be given the opportunity to create a phrase that consists of 12 or 24 words arranged in a specific order. Make sure you properly store this phrase to ensure no one else gains access to it.
If you lose your wallet or find that it's broken, you can claim your assets with your crypto seed phrase. There are many reasons why you might lose your wallet. For example, some owners accidentally delete a specific wallet application from their smartphone or desktop. There's also a chance that your hardware wallet or device will be stolen. Even if you lose your phone or computer, your crypto wallet can be restored on another device.
How Do Seed Phrases Work?
Among the most commonly used standards for these phrases is Bitcoin Improvement Proposal 39 (BIP39). Even though this standard was initially meant to be used with Bitcoin wallets, it has since become widely used across the entire crypto industry. When it comes to crypto wallets, BIP39 defines how wallets are supposed to generate their phrases. It also reinterprets every word for effective wallet recovery.
Before new private and public keys are made for a crypto investor, the wallet generates a phrase or asks the user to input one of their own. Once you've selected a phrase, the software will then convert the words into a binary seed consisting of a sequence of ones and zeros. This phrase is used to create a set of public address pairings and private keys.
While BIP39 is the most widely used standard, it's also possible to use BIP32 and BIP44 during this process. These standards are considered part of BIP39, and are designed to organize addresses in a tree structure. This allows for numerous key pairings and child pairings to be made. By utilizing this structure, you add an additional layer of security and privacy to your wallet when making transactions.
Once you've generated a wallet address, as well as additional private and public pairings, you won't need to use the recovery phrase to access your holdings. Instead, you'll be able to log in to your software or hardware wallet with a PIN or basic passcode when completing transactions. In this scenario, you're able to keep your private keys from being viewed by other people.
You can also benefit from the backup seed phrase if you happen to lose your device, which means that your phrase should be kept in a different location than your crypto wallet.
How to Generate a Seed Phrase
There are three separate techniques you can use to generate a crypto seed phrase, primarily with a crypto wallet. The majority of crypto wallets automatically generate seed phrases when you first set them u[. However, you don't have many options for customizing the phrases. If you're fine with never changing the phrase, this option is perfect for you.
It's also possible to generate a phrase with an app. Certain apps let you generate a phrase, as well as an encrypted vault that will hold your phrase and digital assets for extra security.
If you'd like to generate a phrase offline, you can do so with a calculator. The calculator will need to come with "random" functionality in order to create a phrase that has a random selection of characters. Keep in mind that calculators have some security issues, since multiple devices are needed for the phrase generation process. Along with a calculator, you must use an air-gapped computer, one that cannot be connected either physically or wirelessly with other network devices. This solution allows you to keep your data secure.
Best Practices for Managing Seed Phrases
The seed phrase you generate for your wallet grants you access to your crypto assets. To avoid losing this access, you must properly manage your phrases. While it's possible to store your phrase digitally, you should avoid doing so. Even if the phrase is password protected, it could be exposed to criminals and hackers if your device goes online.
You could choose to memorize the phrase. However, most people don't have perfect recall, which is why the best option is to use a more traditional security method. Write down the phrase in its correct order before placing the paper in a secure location. Since a fire or flood could damage this piece of paper, store it in a personal safe. Most models offer ample water and fire protection. Another option is to buy a steel wallet, which offers similar protection and is much smaller than a safe.
Risks of Losing or Exposing Seed Phrases
There's always a risk of losing or exposing the phrases you've generated for your crypto wallets. You can, however, mitigate these risks with the right approach. While you can obtain a noncustodial crypto wallet to gain full control over your private keys, you'll be solely responsible for making sure your seed phrase is protected. In the event that you lose access to your primary wallet as well as your recovery phrase, it will be almost impossible to recover your funds.
There have been cases of crypto holders entering their seed phrases into phony websites impersonating those of actual online wallets, such as MetaMask. Always make sure that you’re on a crypto wallet’s authentic site before entering your seed phrase, because scammers who induce you to enter your seed phrase on a copycat site can drain your crypto wallet, rendering your assets unrecoverable.
Steps to Recover Crypto Assets Using Seed Phrases
Recovering your crypto assets is relatively easy if you have a crypto seed phrase. Below is a step-by-step guide to recovering assets from a Ledger Nano X wallet.
Step 1: Restart your wallet in Recovery Mode
There are two buttons on the Ledger Nano X, one of which is right beside the USB-C port. Hold down this button until the logo appears. You'll then be given instructions on how to perform different tasks. Use the left and right buttons to move between options before landing on the Restore option. From here, press both buttons at the same time to confirm your choice.
Step 2: Choose a PIN
You'll be tasked with creating a PIN before you can access your device. This PIN can be anywhere from four to eight numbers. Press both of the buttons down at the same time when you've set your PIN.
Step 3: Add your phrase
Once your PIN is set up, add your phrase. With Ledger, begin by adding the first two letters of each word. From here, click both buttons to bring up a series of words. You can then click on the correct word before moving onto the next one. Once you've entered the entire phrase, click both buttons again to gain access to your assets.
Step 4: Reinstall your apps
After you gain control of your wallet, install your crypto apps once again before adding your account to the Ledger Live app.
Common Myths About Seed Phrases
There are several myths about crypto seed phrases that should be cleared up. While many crypto investors believe that these phrases are the same as private keys, they are two different things. The phrase is a readable version of a private key.
You'll also notice that numerous companies advertise online storage methods for crypto seed phrases. In fact, many investors choose this option. The issue with storing your phrase online is that it can be hacked. Your phrase needs to be stored offline and in a safe location.
Conclusion
Crypto seed phrases are the perfect security feature for crypto assets. As long as you keep your phrase safe and secure, you should never need to worry about permanently losing the assets you've spent time collecting. Once you've generated a seed phrase, you'll have everything you need to begin making investments in crypto.
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