Hardware wallets for cryptocurrency, manufacturers review and operation principle

After a successful hacker attack on Binance, sales of hardware crypto wallets of the Ledger company have doubled . Users once again made sure that even the largest exchanges cannot guarantee the complete safety of their users' crypto assets. The head of Ledger, Pascal Gauthier, noted that the level of security offered by such platforms today is too low to protect cryptocurrency savings.

That is why the hardware wallets market is growing rapidly. In the article we will understand what the situation on the hardware wallets market is, what the industry is waiting for in the coming years, what are the current technological trends, and also find out what solutions experts are choosing.

Market overview of hardware crypto wallets

Hardware crypto wallets, or cold wallets, are considered the most reliable compared to hot and local alternatives. These devices are presented in the form of a special flash drive that stores cryptocurrencies and keys to them. Such a wallet does not have permanent access to the network, it connects to it through a computer using USB, Bluetooth, NFC or optionally Wi-Fi.

Hardware crypto-wallets have several levels of protection: passwords for login, for access to balance, code phrase for restoring access to the repository. Thanks to all this, they are considered the most reliable.

There are few manufacturers on the market. Main players: Ledger, Trezor, KeepKey, Digital BitBox, Coinkite, BitLox, CoolWallet and CryoBit. Among them the leading positions are occupied by Ledger and Trezor. In 2016, Ledger sold wallets for $ 734,000, and by the end of 2017, the company sold over a million devices to 165 countries around the world, gaining $ 52.9 million ($ 29.4 million of net profit).

In 2018, Ledger earned $ 116 million, selling a total of more than 1.3 million units. Sales volumes of other companies are unknown, but most likely they are smaller. For example, according to unofficial data , Trezor sold more than 800,000 devices.

Prospects for the development of the hardware wallets market

According to forecasts of Mordor Intelligence, the international market of cryptocurrency hardware wallets could grow by almost 300% over the next five years. According to analysts, in 2018 this segment was estimated at $ 129 million and by the end of 2024 should grow to $ 496 million. The CAGR (cumulative average annual growth rate) of the market in the next 5 years will be 24.63% per year.

The most significant and rapid growth is expected in the Asia-Pacific region. While the ban on digital currency exchange in China may hamper the regional development of this sector, the growing acceptance of the digital economy in the rest of the region, especially in Japan, Australia, South Korea and Southeast Asia, is creating a mass market for cryptocurrencies in the Asia-Pacific region.

At the same time, North America, especially the United States, will still play an important role that cannot be ignored. Any changes in the United States may affect the development trend of cryptocurrency hardware wallets.

Biometrics, geolocation and smart cards: current technological trends

Despite all the measures to protect hardware wallets still remain vulnerable. A fraudster can get access to the means: hacking a computer to which a hardware wallet is connected, stealing the wallet itself, attacking a middleman, bypassing pin codes (using a voltage failure or clock failure), can break the wallet on the way to the buyer, lose or steal a sheet with phrase recovery, banal surveillance (peep PIN input).

To protect users' funds from these and other threats, gain competitive advantage and expand the market, wallets manufacturers continue to develop their technology. Recently, several new solutions have entered the market, which were not there before.

Technological trends in the coming years include: biometric user authentication, binding a wallet to a specific geolocation, even more reliable encryption, NFC chips for contactless payment, connecting wallets via Bluetooth and Wi-Fi, transferring hardware wallets to smartphones, storing cryptocurrency keys transactions) and critical personal and other data (bank cards, passwords), electronic signature keys of users.

So, Ledger is working on upgrading wallets so that they can resist professional hackers. The company makes a big bet on the product for corporate clients Ledger Vault. The device is based on a unique technology – an operating system specially designed to work on any safe equipment and to support any cryptocurrency. It allows banks, hedge funds and family offices to manage their crypto assets.

In the spring of 2018, Ledger also announced a partnership with the Japanese financial giant Nomura to launch a joint project Komainu, which will allow large cryptocurrency holders to store their assets in a special storage system.

Ledger expands its market reach and now sells its wallets offline. In the photo – the Duty Free shop at Amsterdam Schiphol Airport:

There are new form factors wallets. For example, the project Cool Wallet has released a hardware wallet in the form of a flexible bank card .

Also recently, several solutions have appeared on the market offering to use smartphones as hardware wallets. For example, Samsung added the functionality of a hardware cryptocurrency wallet to its Galaxy S10 .

This is a significant event for the crypto community, as the brand’s popularity can attract new users, far from the cryptomere. However, the company is not interested in simply competing for a piece of the hardware wallets market pie. Apparently, their goal is to make the hardware wallet of the smartphone a full-fledged payment tool, and not just a safe way to store.

Sony is also developing its own cryptocurrency hardware wallet. And unlike traditional wallets like Trezor One and Ledger Nano S, which allow users to simply connect to a computer and access their private keys and funds, the Sony wallet will store the user's private keys on a smart card. With it, users will be able to pay with a wallet through an NFC chip.

A similar technology was developed by the American startup VaultTel, a small hardware wallet inserted into a SIM card slot. The device can be used on Android phones with two SIM cards or on an iPhone with an additional device. For greater security, the wallet uses biometric authentication of the owner. Another similar example is Parity Signer, which turns any smartphone into a hardware wallet.

Despite all the innovations, in the coming years, the leading positions in the market will most likely remain for Ledger and Trezor.

“Users are quite conservative and are not in a hurry to switch to new solutions, if the current functionality suits them,” said Valery Petrov, vice-president of the RANIB.

Expert Opinion: Review of hardware wallets technology

Valery Petrov, vice president of the Russian Association of Crypto Industry and Blockchain (RACIB), spoke about the device and the merits of hardware wallets.

A hardware wallet stores information about the number of coins, a program for connecting a wallet with an Internet service and cryptographic keys (open and closed).

Key generation based on cryptographic grain is usually used. The system, in fact, generates not two pairs of keys (it is inconvenient to store several generated key pairs separately), but one large number – the so-called seed, or cryptographic grain. And already on its basis one can in a certain predictable way obtain the necessary number of pairs of public and private keys for several purses.

This technology, on the one hand, simplifies the process of generating wallets, on the other hand, it reduces the reliability of the system, which can be leveled just thanks to hardware wallets. This is due to the fact that the owner of the hardware wallet holds this very number – a cryptographic grain.

Thus, the hardware wallet, in fact, contains not just individual keys, but crypto-wallets – since in most cases any means for storing the public and private keys are also wallets.

The security of the hardware wallet is due to the fact that access to it by virus programs or hackers is almost impossible, unlike computers or smartphones. Therefore, to protect the interests of users, the main technological principle is implemented – a cryptographic grain should never leave the device or media on which it is stored (usually a mini-computer in the form of a flash drive).

All cryptographic operations are carried out inside this device connected to the computer, and already signed transactions are sent out. Thus, even if hackers break into a computer, they most likely cannot reach the cryptographic grain.

Ledger Nano S – the most popular hardware wallet in 2018. It supports 25 cryptocurrencies, connects to a computer via USB, it has an OLED display, 2 function buttons and a multi-level transaction confirmation system. The wallet can be carried with you in your pocket, on a key chain or stored in a safe.

The internal structure of the hardware wallet is different. For example, a widely used wallet from Ledger uses two chips.

• The first, the so-called secure element, is a special microcontroller that stores confidential cryptographic data (this is analogous to those microchips used in SIM cards or bank cards).
• The second chip is a microcontroller that solves the peripheral tasks of managing a usb connection, display, buttons, and so on.

The most serious risk of compromising a hardware crypto-wallet lies in the theoretical possibility of distributing flashed wallets in which the microcontroller is programmed in such a way that it allows for a change in memory addressing, in particular – the memory cell in which the seed is stored. But when using certified branded products, this risk is reduced to almost zero.

Theoretically, a hardware crypto wallet can also be compromised using so-called hardware implants, which press the confirm button when a malware is received on the radio. But this requires a non-standard approach and complex execution, and hackers can do this only if they are confident that if they succeed, they will have a very large “jackpot”.

It is also theoretically possible to crack a wallet, if you learn to receive radio signals that are generated when you enter a pin code, but for this you need to be in close proximity to the wallet owner.

Trezor T – supports about 1000 coins, is controlled from the OLED-display by two function buttons, the access recovery function is provided. The company was the first in the market and until the arrival of Ledger remained the leader.

Other manufacturers of hardware crypto wallets use only one chip, the most famous of them – Trezor. It uses a general-purpose microcontroller based on the ARM architecture. This chip is responsible for storing and processing data, as well as managing the crypto-wallet itself, the display, the buttons and the overall operation of this device.

The possible hacking scenarios here are the same as those described above, with the amendment that in this case it is enough for attackers to access only the flash memory of the microcontrollers in order to learn the cryptographic grain. But with high-quality firmware, it is almost impossible to hack it, so there is only one way to access the funds – through the hardware of the wallet, which is only possible through direct contact with the device.

By the criterion of price / quality, the most interesting proposal at the moment is the solution from Trezor and its clones, widely represented on the market. And among them there are a number of solutions that have surpassed the parent company in their functionality and are not inferior in safety.

Publication date 05/06/2019
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