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.
- 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:
- It is a public ledger that everyone can inspect but which no single user controls.
- The structure and design of block chain is such that all the data in it are about crypto currency only.
- 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
- 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.