The hardware wallet communicates with a client wallet software in a computer. This client can be either a wallet program or a web wallet running inside a web browser. In any case, the client only acts as an intermediary between the hardware wallet and the blockchain, merely transmitting the transactions signed inside the hardware wallet. Some wallet software projects have a support for hardware wallets.
Transactions are sent from the client wallet on the computer to the hardware wallet through some connection, usually USB. Signed transactions are returned from the hardware wallet through the same connection. Hardware wallets usually have a small screen to show the user information about the transaction, and some buttons to allow the user to decide whether to sign the transaction or decline it. If malware is installed in the user’s computer, it could change the details of the transaction being sent over to the hardware wallet. The screen in the hardware wallet showing details of the transaction about to be signed is meant as a protection against this kind of attack. It is also common for the hardware wallet to require a PIN or a password to accept transactions coming through the connection.
Popular hardware wallets supporting these standards are:
1- Trezor: Trezor is a very tiny computer rather than a smartcard. Private keys are still generated offline. Trezor also generates a 24-word seed upon setup. The Trezor has its own built in screen where the seed is displayed and copied down during backup. Since the Trezor is an offline device it offers extra security since the seed isn’t displayed on an online computer.
An additional passphrase can be added to the 24-word seed. This provides extra protection, since anyone who finds someone else’s 24-word seed is free to access the funds. If the optional passphrase is added, an attacker still wouldn’t be able to access funds without both the seed AND the passphrase. If the passphrase is forgotten, it cannot be recovered.
2- Keepkey: KeepKey is the latest Multi-supporting Crypto Hardware Wallet to hit the Market, providing an offline storage for many Cryptocurrencies like Bitcoin, Ethereum, Testnet, Litecoin, Namecoin, Dogecoin, and Dash. This is a Micro USB to USB device featuring a Built-in Screen that stores and secures your Cryptocurrency via an offline device accessible just for the end-user.
When you entrust KeepKey with your Cryptocurrency Holdings, each and every transaction must be approved via it's OLED screen and built-in confirmation button. Making it almost impossible for virtual attackers to directly steal from you since the device can be managed offline and should be left with you for safekeeping.
3- Ledger Nano: The Ledger Nano is a smartcard based hardware wallet. Private keys are generated and signed offline in the smartcard’s secure environment. The Nano is setup using the Ledger Chrome Application. A random 24-word seed is generated upon setup and backed offline by writing it down on a piece of paper. In case of theft, damage or loss, the entire wallet can be recreated with the seed. A user selected PIN code is also assigned to the device to protect against physical theft or hacking.
This pic shows as an example a Trezor hardware wallet in operation, with an address and a bitcoin amount, prompting the user to either confrm or deny the transaction. The hardware wallet is connected to a computer through a USB port, and prompts the user for a PIN via the computer’s wallet software.
The hardware wallet is almost as convenient as using the personal hot wallet, but it is more secure because it is impossible for your private keys to be exposed to the Internet. Your bitcoins on the device will always be in cold storage. One downside to this method is that you need to purchase a piece of hardware, instead of just downloading a free open source program. Another disadvantage of using your hardware wallet is that you can lose it, which might lead to lost your bitcoins (although some hardware wallets provide ways to back up your bitcoins). Although the hardware wallet is an excellent combination of convenience and security, you might not want to rely on one to store your bitcoins for decades, because no data is yet available on the lifetime or durability of such devices.
To protect against loss, theft, or malfunction of the hardware wallet, the user must keep a copy of the private key on some other medium, such as paper or external storage.
Hardware wallets usually allow the user to make a copy of the private key during initialization of the device. In particular, TrezorTM uses deterministic wallet technology to generate many addresses from a single master private key, and therefore only a backup of this master key is necessary.
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