Blockchain Technology: Prospects and Challenges

What is a Bitcoin Hardware Wallet and how it works?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Cryptocurrencies

Mains level : Issues with Cryptocurrencies

Last week, Twitter CEO announced his payments firm Square would soon build a hardware wallet to store bitcoin.

Bitcoin Hardware Wallet

  • The wallet will be a type of plug-in device, much like a USB pen drive that stores, manages and secures a user’s crypto assets.
  • Each digital asset is linked to a cryptographic password called a ‘private key’ to allow users to access it.
  • This key safeguards cryptocurrencies from theft and unauthorized access.
  • The asset owner, with the help of a secure hardware wallet, can access the private key to buy and sell crypto assets from anywhere.
  • Most hardware wallets allow users to manage multiple accounts; some even allow users to connect to their Google or Facebook accounts.
  • Popular hardware wallets include Trezor, Ledger, KeepKey and Prokey.

How is it different from a software wallet?

  • Cryptocurrency keys can be stored in two kinds of wallets – software and hardware.
  • Software wallets are like smartphone apps that digitally store private keys.
  • Most software wallets don’t charge users to store private keys but may collect a commission for trading via the app.
  • These wallets can be vulnerable to malware.
  • Hardware wallets and physical devices act like cold storage for confidential keys. The passwords are protected by a PIN, making it difficult for hackers to extract private keys as the information is not exposed to the Internet.

The upsides of a hardware wallet

  • Hardware wallets are said to be convenient as they can be connected to trading exchanges to complete transactions.
  • Hardware wallets are often stored in a protected microcontroller and cannot be transferred out of the device, making them secure.
  • Their isolation from the Internet also mitigates the risk of the assets being compromised. Moreover, it does not rely on any third-party app.

Limitations

  • Since the wallet is in physical form, the device could be stolen or destroyed.
  • They could be used by malicious actors to steal confidential data.
  • The device can also be expensive as compared to software wallets.
  • Some hardware wallets can also have complex features, making it difficult for first-timers to understand.

Answer this PYQ in the comment box:

Q.With reference to “Blockchain Technology”, consider the following statements:

  1. It is a public ledger that everyone can inspect but which no single user controls.
  2. The structure and design of block chain is such that all the data in it are about crypto currency only.
  3. Applications that depend on basic features of blockchain can be developed without anybody’s permission.

Which of the statement given above is/are correct?

(a) 1 only

(b) 2 only

(b) 1 and 2 only

(d) 1 and 3


Back2Basics: Cryptocurrencies

  • A cryptocurrency is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of a computerized database.
  • It uses strong cryptography to secure transaction records, control the creation of additional coins, and verify the transfer of coin ownership.
  • It typically does not exist in physical form (like paper money) and is typically not issued by a central authority.
  • Cryptocurrencies typically use decentralized control as opposed to centralized digital currency and central banking systems.
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Meet Bhaladhare
Meet Bhaladhare
1 year ago

(d) 1 and 3

Jason Boo
Jason Boo
3 months ago

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Last edited 3 months ago by Jason Boo