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Author : Bitconnect
Disadvantages. Security Implications and risk of coin theft. Lack of control with some providers. Lack of system transparency. Summary. The web-based wallets are easy to use for beginners and are good for storing everyday amounts of coins. This also includes exchange wallets, which if a large amount is to be transferred / exchanged it should be done in smaller blocks and never stored in it long term, $1000s of coins can be stolen/vanished in an instant in the event of the wallet provider being hacked. It is therefore one of the least secure ways to store coins, along with desktop wallets. Coinbase Multi-Sig Online Wallet. A multi signature online wallet is a type of online wallet that uses more than one private key. I will use the coinbase multi-signature vault at as an example at https://www.coinbase.com/?locale=en . These work by storing three keys typically. The design is one of the best balances between convenience and security, and protects you if the wallet provider is hacked/becomes insolvent in the case of coinbase. These wallets work by having three keys. One is held by coinbase themselves. A second is created on your machine, encrypted with a passphrase that is not sent to coinbase and then transmitted and stored on their system, this is the ‘shared’ key. The third key or ‘user’ key is held by you only and along with the encrypted shared key printed out by the user as a backup. This wallet works on a 2-of-3 system, to withdraw coins you log into your coinbase online account and it sends the encrypted key to you (behind the scenes) and you simply enter your passphrase to withdraw it.
If coinbase becomes insolvent, you can recover your coins by your passphrase and the third ‘user’ key. If you forget your passphrase, you can supply coinbase with the user key and recover your coins that way. It allows for convenience and high levels of security, provided the wallet is set up on a non-compromised machine it is the safest online wallet present and is in a class of its own in terms of security for an online wallet. This is safe for long term coin storage. Advantages. Reasonably easy to use. Convenient, yet highly secure. Funds can be transferred and moved without coinbase. Disadvantages. The user must store the user key and / or remember their passphrase. Losing the user key and forgetting their passphrase would mean the funds are lost. Multiple copies should be stored safely. Requires trust that coinbase does not modify the front-end software to transmit the passphrase. Moving the funds without coinbase must be done on a secure machine. Summary. This is the most secure online wallet on the internet for bitcoins and is recommended if you wish to store coins online with the convenience of an online wallet, yet with security close to hardware or paper wallets. It is immune to government seizure of coinbase, and hacks to coinbase, as even if the coinbase key is stolen, it is useless on its own, and the key held by both you and coinbase is encrypted and never decrypted on their servers. The next section is going to discuss hardware wallets.
Hardware Wallets. Hardware Wallets are a type of wallet which are an external piece of hardware to your computer. Some resemble a USB memory stick, others resemble a little device, but nearly all of them use USB. This section will discuss and compare two different brands of hardware wallets. Hardware wallets have a security advantage that transaction signing only occurs inside the machine, meaning malware cannot snatch the private keys from system memory. They are as secure as paper wallets in many ways. The two brands which will be compared are LEDGER at https://www.ledgerwallet.com/ and TREZOR at https://bitcointrezor.com/. LEDGER. Ledger is a brand of hardware wallet which resembles a USB stick. Ledger works through its own application which is a chrome browser plugin or online plugin. It works by sending the transaction to be signed inside the device which is secured with a PIN which after 3 incorrect attempts wipes the wallet. The device is like a smart card. It also sends a challenge with a visual indication of the address you are trying to send coins to, on an external device such as a mobile phone or uses a security card, to verify that malware has not changed the address you are sending coins to. The ledger much be set up on a secure machine as it displays it’s recover seed which can be used to rebuild the wallets private keys if the wallet is lost or damaged. This should be printed out, never saved on any machine that is connected to the internet and stored safely. The ledger is a high security solution and is many times more secure than generic online wallets and the bitcoin QT client and can be carried and used on a set of keys.
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