By (Twitter @democurrency)

1. Background

Bitcoin is a kind of internet information asset. We are very clear that the security risk of an internet information asset is much greater than for a physical asset.

Information security risk falls into two categories: risk of information leakage, and the risk that the integrity of information is destroyed.

1.1 Risk of information leakage

Ownership and control of network asset are only realized through the accounts and passwords.

Bitcoin is an extreme example of this, as the private key is everything. Bitcoin account address can be derived from the private key; this is totally different from all network assets we know before. As for other network assets, the account name and password are not mathematically associated; they only have a corresponding relationship in the database. Failure to recognize this huge difference is a major reason why a lot of rookies lost a lot of Bitcoin.

Bitcoin payment is done by the private key signature.

All current Bitcoin wallets are vulnerable to hackers, because the private key generation, decryption, signing , transaction information broadcast are all done by a software that is connected to the internet, making it possible for hackers to steal the private key through the network and thus get all the coins.

In short, if the private key is connected to the internet via an automated program, then it is not secure.

1.2 Risk that the integrity of information is destroyed

As mentioned above, the private key represents the ultimate control of Bitcoin. Loss of the private key results in irreversible loss of bitcoin in the account.

Since the private key (encrypted or not) is stored in a file in a computer (or smartphone), and the computer is always running many other programs, Bitcoin is easy to get lost due to poor backup or computer system failures, this kind of loss happened very often in the early times, someone even lost ten thousand coins at a time.

So, Bitcoin account has huge risks both in theory and practice, we need effective technical solutions. This is the fundamental reason why we decided to develop a Bitcoin hardware wallet.

2. Principle of improving Bitcoin account security

Based on the analysis above, we can come to a conclusion: to improve Bitcoin account security, we must realize the following three indispensable requirements:

2.1 Independent hardware carrier

Only when the Bitcoin hardware is independent is the private key difficult to be stolen by hackers and not vulnerable to computer malfunctions.

2.2 Not connected to the internet

Only when it is disconnected to the internet is it impossible for hacker to invade and steal the private key.

2.3 No automatic communication with online devices

Internet is just one of many communication channels, there are many other channels, such as NFC, Bluetooth, USB, COM, etc.. As long as automatic communication is possible, the private key can be automatically sent by a backdoor program via the communication channels to the internet. Because many kinds of communication are wireless, this risk is bigger than we think.

Let’s combine the three requirements discussed above into one sentence: we need to store the private key in an independent physical carrier that has no automatic communications with devices connected to the internet.

The physical carrier is vividly called a "hardware wallet".

Now, many people buy a computer and install bitcoin-qt, and do not do any other things on this computer for the sake of safety. Essentially, this computer is a hardware wallet. So, compared to a computer, it is obvious that a dedicated hardware wallet is much better in terms of cost, ease of use, and safety.

Paper wallet, brain wallet are also hardware wallets in a broad sense, they are low-cost solutions, and have their own advantages and disadvantages. Obviously, if cost is not a major concern, a dedicated hardware wallet is a better choice.

(To be continued)